Memo to Meme Raiders: Squeezable Stock Shorts Are Taking Cover

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It doesn’t seem like it, with bear raids breaking out everywhere and hoisting names like AMC Entertainment Holdings Inc. and Clover Health Investments Corp. to the moon and beyond, but the opposition is getting wise to the ploy.

While dismantling positions that may have taken years to build takes time, data show the number of extremely ripe targets for short squeezes has fallen precipitously in the U.S. stock market since winter.

The number of companies with bearish bets equating to at least 30% of their shares has shrunk to 18 from 43, according to data from Barclays Plc. The drop was more pronounced in dollar terms: an 80% plunge to $5 billion.

Memo to Meme Raiders: Squeezable Stock Shorts Are Taking Cover

Part of it may be that the general direction of the market remains up, but it’s hard not to see the pullback as a direct reaction to the success of meme-stock raiders aiming their crowd-sourced campaigns directly at bear-trader favorites.

In conversation with hedge-fund clients, Wells Fargo & Co. strategist Chris Harvey has noted growing angst over getting squeezed amid the retail-driven rally in smaller firms. Some, he says, have shifted their short book to exchange-traded funds and large companies.

“Many have taken their ball and gone home or elsewhere,” Harvey said in an interview. “For now, it’s not a worthwhile fight.”

The frenzy among day traders on Reddit’s WallStreetBets forum to band together and take on professional short sellers has forged ahead this week, with ContextLogic Inc. and Wendy’s Co. becoming the latest targets. The craze started with GameStop Corp. in January, and at that time, it forced hedge funds to yank money from the market at one of the fastest rates on record.

But bearish positions have since fallen dramatically, indicating a low risk of spillover, according to Barclays strategists led by Maneesh Deshpande.

This time, hedge funds appear to be in no rush to buy back shares and cover their shorts. Take last Wednesday, for instance, when the top 10 most-shorted stocks handed $4.5 billion in unrealized losses to bears, short covering among hedge funds was less than one-fifth the pace seen in late January, according to prime-broker data compiled by Goldman Sachs Group Inc.

“The current short squeeze is more localized probably because the number of stocks with high short-interest has come down dramatically,” Deshpande wrote in a note to clients. “Given the low risk of a broad contagion, we view the fallout of the recent short squeeze to be limited.”

By Barclays’s tally, short sales across the board amounted to $900 billion, or 1.9% of the total market value of American equities, a sign that short sellers have not extended themselves. While the overall pool of bearish bets has stayed roughly the same as January, those heavily shorted have dwindled to less than 1% of the total from 2.8%.

“Everybody talks about whatever you do, don’t short any of these meme stocks,” said Matt Maley, chief market strategist for Miller Tabak + Co. said in an interview on Bloomberg Television with Alix Steel. “I totally agree because you can lose more than 100% of your money.”

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