
What a wild week on Wall Street. And it was driven by Main Street.
We’ve gotten used to the rise of the “fad stocks” that move higher because of their Internet fame (hello, Tesla). But this week, the internet latched onto down-and-out stocks in hopes of teaching short sellers — Wall Street’s most vocal investors — a lesson through short squeezes. And it was madness.
GameStop, an unprofitable video game retailer, became social media’s biggest target. In a matter of two weeks, GameStop’s shares soared from under $20 to almost $350 (as of January 27 close). We’ve seen some wild things in the market lately, but this might just take the cake.

Short squeezes aren’t a new phenomenon. And as many seasoned investors know, they aren’t exactly easy money.
Here’s what you need to know, including how to think through investments in fad stocks and short squeezes.
What’s a short squeeze?
Short selling involves borrowing shares of stock with a goal of selling those borrowed shares and then, (hopefully) buying the shares back at a lower price. The short seller then returns the borrowed shares to their original owner, having pocketed the difference between selling high and buying low.
Short sellers play an important role in markets, and they often serve as the watchdogs for fraud and deceit in stocks. Shorting doesn’t always work out though. Sometimes, the price of a shorted stock rises quickly, and the short seller (person betting the stock is going lower) is forced to buy back the stock at a higher price before their losses pile up. That’s a “short squeeze,” and it can lead to a surge in buying if the stock is heavily shorted. Remember, the short seller’s gain/loss is calculated as the price they sold the shares for at the start of the transaction, less the price they bought it at.
Short sellers and short squeezes have been around for generations. In 1863, Cornelius Vanderbilt organized a short squeeze against investors who shorted Harlem Railway. In the early 1920s, the founder of Piggly Wiggly (a grocery store chain) infamously ignited a short squeeze in his own stock, which eventually ruined him financially. Another legendary short squeeze took place in 2008, when a short squeeze in Volkswagen shares made the carmaker the biggest publicly traded company in the world.
Following the Crowd
This week, short sellers found themselves on the wrong side of the market. Dramatic short squeezes organized by social media fueled crazy, inexplicable moves in individual stocks.
A Week of Dramatic Short Squeezes
Performance in the Top 10 Most-Shorted Russell 3000 Stocks
Ticker | Name | Short Interest (% Equity Float) | January 22 Share Price | January 28 Share Price | Change This Week |
---|---|---|---|---|---|
GME | GameStop | 142 | 65.01 | 193.60 | 198% |
DDS | Dillards | 92 | 79.80 | 84.16 | 5% |
BIGC | BigCommerce Holdings | 74 | 71.25 | 80.72 | 13% |
BBBY | Bed Bath & Beyond | 67 | 30.21 | 33.64 | 11% |
LGND | Ligand Pharmaceuticals | 65 | 142.62 | 191.59 | 34% |
FIZZ | National Beverage | 62 | 98.44 | 157.17 | 60% |
AMCX | AMC Networks | 59 | 49.38 | 47.74 | -3% |
MAC | Macerich | 59 | 14.25 | 19.01 | 33% |
ASO | Academy Sports | 55 | 22.46 | 21.07 | -6% |
SPWR | SunPower | 54 | 47.21 | 52.89 | 12% |
Source: Ally Invest, Russell Indexes, NYSE
*Short interest data as of 1/15/2021
The top 10 most-shorted stocks in the Russell 3000 have risen an average of 36% this week, compared to a 1.7% loss in the index. Bed Bath & Beyond, a struggling home goods retailer, jumped as much as 75%. AMC, a movie theater chain on the brink of bankruptcy, has increased as much as 500%. The stock price of a holding company for Blockbuster (yes, the Blockbuster that went bankrupt years ago) has exploded.
Options tied to these stocks have become a feeding frenzy too. An average of 1.3 million GameStop options have traded each day this week, compared to its 48,000 average daily options volume in 2020. Option prices have blown through the roof and big options dealers, called market makers, juiced the squeeze by hedging their risk through the purchase of stock.
The Danger of Short Squeezes
Short squeezes seem exciting on the surface: They lead to higher prices and epic market stories. But they can be a dangerous proposition for both sides.
This particular short squeeze could follow the classic pattern of past squeezes: quick rise, quick fall. In the Volkswagen squeeze, shares soared 300% in just two days, then plummeted 44% on day 3. So far, we’ve already seen massive swings up and down in GameStop. On Monday and Wednesday, GameStop shares slid more than 50% intraday (before rocketing higher again). The stock was even halted a few times for volatility. Squeezed stocks can move violently for no reason, and the tide can turn quickly. And when the squeeze is done, everybody tries to sell at the same time.
Staying Sane
So how do you stay sane in this madness?
The lure of the short squeezes. Chasing the squeeze is like buying a lottery ticket. You might profit, but you might also lose everything. This type of speculative trading is more about luck and less about skill. If you benefitted from a pop in any of the short squeezes and locked in those gains, consider yourself one of the lucky ones.
Understand the risk in options. When you trade options on a wild stock, your trade doesn’t just depend on the stock’s direction. Options prices can swing wildly (like they have in GameStop), especially if the stock is heavily shorted and shares are hard to borrow. And some options trades, like call selling without a hedge, have unlimited loss potential.
Do your homework on fad stocks. It’s tough to sort through what’s legitimate and what’s not, and many fad stocks’ stories can end poorly. Just look at Nikola, the electric vehicle stock whose shares surged eight-fold last year before they tanked on allegations of fraud (even duping GM). Or Hertz, whose stock spiked 900% in May after it started bankruptcy proceedings (spoiler alert: Hertz tried to sell more shares, the SEC stepped in, and it’s still bankrupt).
The key is to look for fundamental reasons (earnings, cash flow, new strategy, or management) that back up the move higher in a stock. If that is missing, you may want to rethink your investment strategy on a particular stock.
Fads and short squeezes aren’t going away. It’s human nature to follow the crowd, especially when it looks like the crowd is right. When you’re stuck at home with nothing to do, stock speculation may be extra enticing.
Gains are rarely this easy though.

Lindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo-advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.
Lindsey holds a passion for teaching individuals how to become successful long-term investors. She is a contributor at CNBC, and frequently shares her insights with various publications including the Wall Street Journal, Barron’s, MarketWatch, BusinessInsider, etc. She also serves on the board of Better Investing, a non-profit organization focused on investment education.
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The opinions expressed here are not meant to be used as investing advice. For more information, visit our website.
Options involve risk and are not suitable for all investors. Review the Characteristics and Risks of Standardized Options brochure (https://www.ally.com/resources/pdf/in…) before you begin trading options. Options investors may lose more than the entire amount invested in a relatively short period of time.
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Comment on this article
Comments
Eddie D. on January 29, 2021 at 4:37pm
I didn't like the fact that I couldn't access my account, either on-line, or with the app for quite a while. NOT GOOD! Meanwhile, the market activity was screaming at me to make a move. I have cashed out all my positions, and I am now waiting on the sidelines trying to decide if I want to liquidate, and close out my account. I don't think you should have a right to tell me that I can only buy a particular stock on limit.
Rodney E. on January 29, 2021 at 5:21pm
If you are a trading platform then don't express an opinion on people's trades or trading philosophy. I get that you couldn't handle the volume so build your infrastructure instead of opining on trading philosophy.
Karl P. on January 29, 2021 at 5:33pm
You fail to discuss the crux of the matter. Why has ALLY shut down their trade platform for the past three days to retail investors. Please don't use the excuse the servers were overwhelmed, I have an IT background, and my guess is ALLY has redundant servers and trunk lines. Since all the major retail brokerage houses brought down their services at the same time for the same length of time for the past three days, this is not a coincidence, rather a coordinated outage to keep retail investors from trading. If you are so worried about social media and the short squeeze, get rid of option trading. Option trading is more like gambling than investing. Oh that's right, MMs make a killing on options, until they get squeezed...
Michael S. on January 29, 2021 at 6:19pm
Interesting - for me the news of the week was being locked out of my Ally account on Wednesday, Thursday AND Friday for approx 3 hours each day starting at the market open. Since then not one Ally executive reached out via email with an explanation as to why it happened - leaving me with ZERO confidence that Monday will bring anything different. My advice to you - less thought pieces and more focus on your flimsy platform
NW on January 29, 2021 at 7:12pm
Ally Invest joined Robinhood in removing the ability for investors to buy GME shares while hedge funds attempted to artificially plummet the stock. This was an illegal action and any advice from this broker should be ignored and considered against the interest of retail investors. If you are an Ally Invest customer, report them to the SEC and switch to Vanguard or Fidelity.
Jared U. on January 29, 2021 at 11:33pm
This Article does make good points, however it fails to represent the shareholder who said, "this stock wont to bankrupt" (AMC) and only talks of those who bought their shares a few days ago. When the squeezy happened and Ally shut down, those who did buy months ago were left in the dark though no fault of there own. Perhaps the servers couldn't handle the volume of trades being made, but it cost me a dollar per share on my stock.
Jim G. on January 30, 2021 at 4:25am
I use Ally Invest for my personal trading account. Their platform is clean and works well.
Diamond H. on January 30, 2021 at 10:49pm
But if you're in. HOLD.
Patrick W. on January 31, 2021 at 1:54pm
You didn't even begin to scratch the surface of what's going on with the whole GameStock phenomenon, and that was disingenuous. It's more about sending a message than it is profiting from the stock. Money should go to those who create valuable goods and services in a free market, not those who steal the productivity and savings of others through a corrupt monetary and investment system. This is why the honesty of sound money (gold, Bitcoin) create such fear and loathing in the establishment types like Janet Yellen (she received $800k from Citadel - one of the hedge funds shorting GameStop and shutting down trading this past Thursday to protect themselves). The whole GameStop movement is not about making money. It's about making a statement against the greedy elite who feed off of society while producing nothing of value and who, in fact, do harm by shorting the stocks of struggling companies who have employees. Bitcoin, GameStop, and the whole Trump movement are actually part
Patrick W. on January 31, 2021 at 1:59pm
[continued] Bitcoin, GameStop, and the whole Trump movement are actually part of a populist uprising and they are all connected. It's about free speech, free markets, and honest money - all things we used to have. The existing stock market and monetary system built on debt, fiat money, and corruption will crash as we return to these things. Elon Musk understands what's happening and that's why he added #bitcoin to his main Twitter page. He gets it because he’s an engineer and an honest man who’s main goal is to move humanity forward, much like Steve Jobs did. We need more men like this in the world.
Matt C. on February 1, 2021 at 11:01am
Interesting take. Do you not find it notable that the shorts are still above 100% short and that the recent squeezes, specifically for GME, have been gamma squeezes. lets see those charts and updates and your DD, otherwise it seems like your strategy is just to follow what media is saying vs the real truth. Additionally, what are your thoughts on the gross negligence and collusion of brokerages (Ally being one of them) to shut off purchase power on specific tickers to retail investors, while HFs short laddered to avoid an actual short squeeze on $GME January 28th 2021?
Randy G. on February 1, 2021 at 11:14am
"There was a lot to process in last week's events. Our clearing firm suspended opening transactions of $KOSS, $GME, and $AMC for approximately four hours on Thursday. These types of restrictions are typically put in place to maintain the health of trading platforms, to preserve your access to your accounts, and to prevent further disruptions in the market. We resumed processing opening transactions as soon as we could." TRANSLATION- WE KNOW MORE THAN YOU DO. Very sad that one side of a trade was shut off. I'm disappointed in Ally, et al.
Matt on February 1, 2021 at 12:02pm
You forgot the part about how Ally and other institutions blocked people from making trades to help protect short sellers and drive the price the way they wanted it to go.
Mandi on February 3, 2021 at 2:28pm
I am disappointed that you did not acknowledge that Ally blocked buyers from purchasing GME, AMC, NOK and others. Banning retail investors from these purchases only benefits hedge funds and is manipulation of the market. For this reason, I have called Ally to close out my account today.