US Equity L/S: The Short Squeeze Puzzle of January 2026
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When market optimism runs high, the lowest-quality stocks can suddenly look like the best performers. That’s exactly what’s happening in early 2026.
Since the Fed’s dovish pivot in late November, Goldman Sachs’ “Most Shorted” basket has surged +22%, while its high-quality “VIP” hedge fund favorites gained only +10%.
In other words, the most heavily bet-against stocks have beaten the market’s darlings by 10 percentage points in less than two months.
Why? Because low-quality, heavily shorted stocks thrive when:
• Equity and bond volatility falls
• Credit spreads tighten
• Inflation expectations drop
• Sentiment turns optimistic
And all of those conditions have been in place since November.
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