A massive two-day rally in the stock market is largely attributed to frantic behavior from short sellers covering their losses. Despite no concrete trade deals reached between the US and China, hedge fund short sellers added more bearish wagers after President Trump’s tariff rollout and 90-day pause.
This created an environment where rapid buying forces fueled dramatic upswings, known as a “short squeeze.” When security prices rise unexpectedly, short sellers must buy back borrowed stocks to limit losses. However, when markets suddenly rally on minimal news, the short seller phenomenon can drive up stock prices.
On Tuesday and Wednesday, stocks surged as tensions eased on trade, with Treasury Secretary Scott Bessent stating there’s an opportunity for a “big deal” between the US and China. The Dow Jones Industrial Average gained 1,100 points on its highs, while the S&P 500 climbed 3.5% week-to-date.
President Trump’s sudden reversal on Federal Reserve Chair Jerome Powell also boosted sentiment. However, the rally quickly faded as trading closed, with the Dow up only 500 points at midday Wednesday. Goldman Sachs’ John Flood warned that hedge funds haven’t converted their short-covering into long-term buying positions, indicating a lack of conviction behind the market’s recovery.
Source: https://www.cnbc.com/2025/04/23/credit-a-short-squeeze-for-the-stock-markets-big-two-day-bounce.html