Goldman Signals a New Short Squeeze Wave – Could the Russell 2000 Be the Next Big Winner?

TradingKey - Driven by strong economic data and a macro environment that continues to boost risk appetite, Goldman Sachs’ “Most-Shorted Rolling Index” (GSCBMSAL) has surged dramatically. Historically, such a move could signal that Wall Street is entering one of the biggest short squeezes in years — with small-cap stocks likely to keep rising.

According to Goldman data, the GSCBMSAL index has rallied 42% from its April lows, including a 16% gain over the past month, and a sharp 10.8% rise over the last five trading sessions. Notably, the "Most-Shorted Information Technology/Communication Services Tech Sector" (GSCBMSIT) has led the charge since March.

What Is GSCBMSAL?

The GSCBMSAL index represents a basket of 50 stocks within the Russell 3000 index that are:

• Market cap above $1 billion
• Among the most heavily shorted by institutional investors

This indicator reflects not only market sentiment toward high-risk, high-reward stocks but also the positioning and exposure of hedge funds.

Why This Rally Matters: The Short Squeeze Mechanism

Historically, when these highly shorted stocks experience a significant rally, it often triggers a short squeeze — a scenario where:

• Hedge funds and traders who bet against the stock are forced to buy back shares to cover losses.
• Their buying activity further pushes prices higher, accelerating the squeeze.

This self-reinforcing cycle can drive rapid and substantial gains, especially among small-cap and low-quality names that tend to be more volatile and more heavily shorted.

Goldman’s analysis shows that whenever this index rises more than 15% over two weeks, equities typically continue to move upward as the squeeze unfolds.

Drivers Behind the Surge

Goldman Sachs trader Matthew Kaplan highlights several key factors behind the recent surge:

1. Strong Economic Data: Better-than-expected jobs reports and ISM manufacturing data have lifted growth expectations.
2. Easing Interest Rate Environment: The 30-year Treasury yield has fallen below 5%, easing concerns about borrowing costs.
3. Hedge Fund Positioning: Total leverage among hedge funds has increased by 0.9 percentage points, reaching a five-year high. Net leverage rose by 1.6 percentage points, hitting the 68th percentile over the past five years.
4. Systematic Buying by CTAs: Trend-following commodity trading advisors (CTAs) have net bought $30 billion worth of U.S. equities over the past month.

Market Outlook and Risks Ahead

Despite potential headwinds — including Wednesday’s CPI inflation report, ongoing U.S.-China trade negotiations, and the Senate's consideration of a tax cut bill — Kaplan notes that these shorted stocks have yet to enter an “extreme short squeeze zone.”

Instead, they still face upward pressure, suggesting more room for gains before the squeeze fully plays out.

Kaplan also highlighted that while CTA demand has weakened across most markets, the Russell 2000 remains a notable exception, making it an ideal candidate for continued momentum.