What is a bear squeeze?
A bear squeeze happens when a market or asset price goes up a lot. It goes up because a bunch of people suddenly buy a whole lot of it. When they do this, it puts a big squeeze on the bears.
Who are the bears?
The “bears” are investors who think the price is gonna go down. They’re betting against the market. How do they do that? By shorting the asset. Shorting means they borrow shares of the asset. Then they sell those borrowed shares. They do this when they think the price will drop.
Why does buying pressure hurt the bears?
The bears are waiting for the price to fall. They shorted the asset by borrowing and selling shares. Later on, they gotta buy back those shares to return them. That’s called covering their short.
But uh oh! If a ton of people start buying, it pushes the price up instead of down. That’s bad news for the bears. The higher the price goes, the more money they lose on their short trade.
Driving the bears to cover their shorts
When the price rises a lot, it puts major pressure on the bears. They start freaking out over their short positions. If it keeps going up, they could lose a crazy amount of money.
The bears have to make a tough choice
The bears gotta decide real quick what to do. Should they hold onto their shorts and hope the price drops? Or should they just bail on the trade right now?
Holding on is super risky. The price could keep shooting up and they’d get crushed. But if they buy back the shares now, they lock in a big fat loss. Talk about being stuck between a rock and a hard place!
Short covering adds even more buying pressure
A lot of the bears decide they can’t handle the heat. They scramble to get out of their shorts ASAP. How do they do that? By buying back the shares they sold so they can return them.
When the bears rush to cover their shorts, guess what? They end up buying a huge amount of shares themselves! That’s right, the short sellers become buyers. All that frantic buying puts even more upward pressure on the price. It’s a vicious cycle for the bears.
Examples of bear squeezes in action
The GameStop saga of 2021
In early 2021, GameStop stock went absolutely nuts. Its price shot to the moon in a matter of days. Why? Because a bunch of retail traders on Reddit started buying it like crazy.
At the same time, some big hedge funds were shorting GameStop stock. They were betting it would crash. But the flood of buying caught them off guard. It triggered a massive bear squeeze.
The hedge funds got clobbered as the price skyrocketed. They had to buy back the stock at way higher prices. Some even went bust because of it. The GameStop short squeeze was a wild ride.
Tesla stock keeps burning short sellers
Tesla is another stock that’s famous for nasty bear squeezes. For years, it was a popular target for short sellers. A lot of big investors thought the company would fail. They put their money where their mouth was by shorting Tesla stock.
But Tesla kept proving the doubters wrong. The company grew fast and the stock price soared. The short sellers got caught in a series of painful bear squeezes.
As Tesla stock kept hitting new highs, the bears had to scramble to cover. They bought back shares at huge losses. Some shorts lost billions betting against Tesla. The stock became a graveyard for pessimists.
The dangers of going against the crowd
Fighting the trend is risky business
The bears who get squeezed are usually swimming against the tide. They’re making bets that go against the overall market trend. That’s a dangerous game.
When you short a stock, your losses can be infinite. There’s no limit to how high a stock price can go. If you’re wrong and it keeps rising, you’re toast. Your losses just keep piling up until you cover.
Underestimating the power of hype
A lot of times, bear squeezes are driven by pure hype and FOMO. That’s short for “fear of missing out.” When an asset is skyrocketing, people don’t wanna be left behind.
They see other folks getting rich and they jump on the bandwagon. Doesn’t matter if the price makes sense or not. Emotion takes over and the buying frenzy feeds on itself.
The bears often scoff at this kinda hype. They insist the asset is way overvalued. But the hype train can stay irrational longer than they can stay solvent. By the time they realize they shouldn’t fight it, they’re already in a world of pain.
The short sellers get squeezed to pulp
When a powerful bear squeeze takes hold, the short sellers are in for a beating. They face massive paper losses as the price screams higher. Sooner or later, most of them can’t take the pressure anymore.
They throw in the towel and cover at a steep loss. It’s a frustrating and humbling experience. Some short sellers blow up entirely and go out of business.
The bear squeeze leaves them crushed and battered. They become the laughingstock of the market. Meanwhile, the bulls who rode the rally are partying hard and counting their gains.
