Traders betting against some of the most heavily-shorted stocks are racking up paper losses in an unexpected revival of the meme trade this week.

A Goldman Sachs basket that simultaneously goes long on the stocks most favored by hedge funds and bets against the 50 most-shorted stocks has fallen roughly 11% over the past two sessions — paring back from its worst two-day slump since the height of the retail-trading frenzy in 2021.

Underscoring the performance was a surge in the stocks once popular with the day-trading crowd including GameStop Corp. and AMC Entertainment Holdings Inc. The heavily-shorted names extended gains on Tuesday after each jumped more than 70% in the prior session, leading a rally in companies with high short interest.

Bearish bets on the pair have lost more than $1.3 billion in mark-to-market losses this month: GameStop shorts lost $1.24 billion in May, while AMC shorts lost around $126 million, according to data from S3 Partners LLC.

Most of the losses incurred by short sellers on the meme stocks’ spikes happened in the last two sessions.

“Today’s losses will put a lot of short sellers on tilt and squeeze them out of their positions,” Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners LLC wrote in a report Tuesday. For AMC bears in particular, he added, those losses are “turning their year-to-date and month date profits to dust.”

A short squeeze — where rapid price increases force short sellers to buy back shares to cover their positions, often at a loss — can send stocks even higher and further pressure other shorts. The surge in meme stocks also likely set up a gamma squeeze, that occurs when price increases spur traders to buy call options, forcing market makers to buy the underlying stock and sending shares even higher.

Heavily-shorted stocks continued to rally in Tuesday trading with the ebullience spreading beyond the most popular retail favorites. SunPower Corp. more than doubled before paring gains to around a 60% advance, while BlackBerry Ltd. and Virgin Galactic Holdings Inc. traded as much as 24% and 36% higher, respectively. The former president’s media company Trump Media & Technology Group Corp., a newly minted retail favorite, advanced by a more modest 6.9%.

Shares of GameStop more than doubled at the market open, touching levels not seen since 2021, while AMC rose as much as 129%. The stocks saw the frenzy fizzle in afternoon trading with earlier gains trimmed by more than half.

The volatile trading stands to encourage more short sellers to step into meme stocks. Still, AMC and GameStop remain far below their 2021 peaks, as do other names with high short interest.

“The meme trade is back and short sellers in stocks like GME, AMC and DJT will be teetering on the short squeeze cliff as their stock prices surge,” said Dusaniwsky. 

This article was provided by Bloomberg News.