The US stock market is staging "the biggest short squeeze in years," with the next target being "small-cap stocks"?

Wall Street is experiencing one of the most astonishing short squeezes in recent years, which may continue in the coming weeks.

Goldman Sachs data shows that its tracked "most shorted stocks" index has surged 42% from the April low, rising 16% in just the past month, and skyrocketing 10.8% in the last five trading days.

Goldman Sachs trader Matthew Kaplan pointed out that the recent rise is driven by multiple factors:

First, macro data has shown unexpected resilience, with last week's ISM manufacturing index and non-farm data both exceeding expectations, and this Wednesday's CPI data will be the next key point;

Second, the interest rate environment is becoming more accommodative, with the 30-year U.S. Treasury yield stabilizing below 5%;

Third, the positioning adjustments of hedge funds have also played a role, with the total leverage ratio climbing to the 100th percentile in five years since June, and the net leverage ratio rising by 1.6 percentage points to the 68th percentile;

Finally, systematic funds (CTAs) have net bought about $30 billion in U.S. stocks over the past month, indicating strong short covering pressure.

Moreover, since March, the most shorted tech stocks/TMT sector index tracked by Goldman Sachs (GSCBMSIT) has been leading this round of rebound.

Historical Data Indicates a Positive Outlook, Small Caps May Become the Focus

While the scale of the short squeeze is remarkable, the overall short situation in the market has also reached extreme levels.

Goldman Sachs data shows that the median short interest of S&P 500 constituents is nearing a six-year high, providing ample "ammunition" for a potentially larger short squeeze to follow.

Kaplan noted that although the market is about to face several potential turning points (Wednesday's CPI data, ongoing trade negotiations, and news from the Senate regarding Trump's tax reform proposal), these shorted stocks seem "not yet in extreme short squeeze territory," and may even have further upside potential.

Historically, when Goldman Sachs' most shorted index rises more than 15% within two weeks, the subsequent market often maintains a steady upward trend. Technical analysis suggests that the outlook after this round of short squeeze may still be optimistic.

For investors looking to position themselves ahead of the next upward trend, Goldman Sachs provides a clear direction: although CTA strategies are beginning to weaken in demand across almost all markets, the Russell 2000 index remains an exception.

Kaplan specifically reminds investors to "pay attention to short squeeze opportunities in low-quality stocks," suggesting that small caps may become the next breakout point.

Risk Appetite Returns, But Beware of Excessive Leverage

Overall, although the long-short ratio has significantly rebounded from the record low in April, this indicator still has room for upward movement. However, it is worth noting that the total leverage level of hedge funds has climbed to a historical high at the 99th percentile, indicating that market risk appetite has fully returned.

In May, U.S. stocks recorded their best performance in 35 years, and hedge fund investment strategies have shifted from cautious to fervent. From technology stocks to momentum trading, market sentiment has clearly shifted from worry to optimism, and the sustainability of this sentiment shift is also worth paying attention to.

Although several recent catalysts (such as the CPI data to be released on Wednesday) may impact market trends, the current technical outlook and changes in institutional positions seem to support the continuation of this short-term rally