Meme stocks are running wild again.
Some of the latest highfliers — Krispy Kreme (DNUT), Opendoor (OPEN), and Kohl’s (KSS) — all have one key thing in common: They are heavily shorted stocks.
This means investors have been betting the next price move for these names will be lower, and some strategists suggest that this week’s meme surge is merely the latest pillar of a consistent theme during the S&P 500’s 25% rally over the last three months.
“A lot of what has outperformed significantly [since the market bottom], obviously the memes, but the heavily shorted stocks of every variety,” Charles Schwab chief investment strategist Liz Ann Sonders told Yahoo Finance on Wednesday.
“So I think there may be that also added attempt on the part of the retail trader to press those shorts and force a repositioning on the part of speculators and institutions.”
Short sellers have lost just shy of $355 billion since the market bottom on April 8, according to data from S3 Partners. That includes more than $100 billion in losses since Yahoo Finance last published S3’s data on May 22.
Since President Trump first reversed his starkest tariff stance on April 9, betting against the roaring stock market rally has been a losing strategy. And the market’s V-shape recovery has been more than a simple “Trump Always Chickens Out” (TACO) trade.
Between April 8 and May 20, short sellers lost more than $35 billion betting against the “Magnificent Seven” tech cohort, which has once again been a key driver of the market’s chug higher.
“The market was caught short at a time when there was no actual fundamental information available,” BNP Paribas head of debt and equity strategy Viktor Hjort told Yahoo Finance.
As Trend Labs founder JC Parets wrote in a research note on Wednesday, the stock market’s rise is largely about investor “mispositioning.”
Parets cited a Wall Street Journal poll of economists from April 12, which showed nearly half expected a recession in the next 12 months. “These economists had everyone convinced a recession was coming,” Parets wrote.
So far, that downturn has not come to pass, but investors continue to be caught short as the fundamental story for stocks and the economy has proven to be largely better than feared.
This has driven a risk-on rally that’s featured a race to find where trades are most out of place.
After falling almost 30% to start the year, Cathie Wood’s Ark Innovation ETF (ARKK) is up nearly 90% from the April bottom.
Wood’s flagship fund’s top 10 holdings include names like Tesla (TSLA), Coinbase (COIN), Robinhood (HOOD), and Palantir (PLTR). Short sellers in each of those stocks have lost at least $2 billion or more since the April market low, according to S3 Partners data.
Bespoke Investment Group highlighted this trend in a research report on Tuesday night detailing “reminiscences of 2021,” when the meme stock frenzy first took center stage.
Bespoke found that the 100 most shorted stocks in the Russell 1000 index (^RUI) have outperformed the index itself by over 30 percentage points in the past three months. The index of the 100 most shorted stocks is up over 52% in that time period.
“Expect continued short side losses as the economy grows, despite increased tariffs, and interest rates finally decline later this year,” S3 Partners managing director Ihor Dusaniwsky told Yahoo Finance.
“We usually hear caveat emptor — “let the buyer beware.” But in this market, caveat venditor — “let the seller beware” — is much more appropriate.”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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