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Short Squeeze Sends US Stocks Soaring as $93B in Bearish Bets Rapidly Unwind

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Brian Armstrong's Bold Prediction: AI Agents Will Soon Dominate Global Financial

TLDR:

  • Heavily shorted US stocks surged 13%, outperforming the S&P 500 by nine percentage points
  • Short sellers covered $93 billion in positions, marking one of the fastest unwinds in years
  • Unprofitable tech stocks rallied strongly, with gains reaching up to 14% during the week
  • Institutional buying and algorithmic funds added momentum to an already accelerating market rally

A rapid unwind of short positions has driven a sharp rally across US equities this week. Heavily shorted stocks surged well above broader indices, as large-scale covering activity and renewed institutional flows accelerated upward market momentum.

Short Covering Drives Sharp Market Rally

Market data shows that short sellers exited positions at the fastest pace seen in recent years. The move triggered strong upward pressure, especially in heavily shorted stocks. These names outperformed the broader market by a wide margin.

A tweet from Global Markets Investor detailed the scale of the move, citing data from Goldman Sachs. It reported that the most-shorted US stocks gained 13% during the week. This performance exceeded the S&P 500 by nine percentage points.

At the same time, short sellers covered about $93 billion in positions across US equities. Data from S3 Partners shows this activity occurred within the same month. This level of covering indicates strong pressure on bearish positions.

As short sellers closed positions, buying demand increased sharply. This forced prices higher, creating a feedback loop across multiple sectors. The process pushed already rising stocks even further.

The trend also extended beyond heavily shorted names. A basket of unprofitable technology stocks recorded strong gains during the same period. These stocks often react quickly to shifts in market positioning.

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Data referenced from UBS shows that financially weak stocks rose by about nine percent. At the same time, broader unprofitable tech names advanced by roughly fourteen percent.

Institutional Flows and Momentum Amplify Gains

The rally did not occur in isolation, as broader market factors also supported price action. Institutional investors and algorithmic funds contributed to the upward movement. These participants had previously reduced equity exposure to lower levels.

As market conditions shifted, these groups began increasing their positions again. This added fresh demand on top of short-covering activity. Together, both forces accelerated the rally across equities.

Algorithmic strategies likely responded to price trends and volatility signals. As momentum built, these systems increased buying activity. This behavior reinforced the upward direction of the market.

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At the same time, institutional purchases provided additional support. Large investors often move capital in response to changing macro and market signals. Their re-entry added stability to the ongoing rally.

However, the pace of the move suggests it may not continue at the same speed. Rapid short squeezes tend to occur over short periods. Once positions are covered, buying pressure can begin to slow.

Even so, the recent activity reflects how positioning can influence market direction. When large short positions unwind quickly, price movements can accelerate across sectors. This dynamic remains a key feature of modern equity markets.

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Crypto World

Aave’s TVL Falls $8B After $293M Kelp DAO Hack

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Aave’s TVL Falls $8B After $293M Kelp DAO Hack

Total value locked on decentralized lending protocol Aave dropped by nearly $8 billion over the weekend after hackers behind the $293 million Kelp DAO exploit borrowed funds on Aave, leaving roughly $195 million in “bad debt” on the protocol and triggering withdrawals.

Data from DeFiLlama shows that Aave’s TVL fell from about $26.4 billion to $18.6 billion by Sunday, losing the top spot as the largest DeFi protocol. 

Aave v3’s lending pools for USDt (USDT) and USDC (USDC) are now at 100% utilization, meaning that more than $5.1 billion worth of stablecoins cannot be withdrawn until new liquidity arrives or borrows are repaid. 

$2,540 is available to be withdrawn from the $2.87 billion USDT pool on Aave v3 at the time of writing. Source: Aave

Aave’s TVL fall shows how rapidly risk from a single security incident can spread throughout the broader, interconnected DeFi lending market, potentially leading to a severe liquidity crisis.

The incident began on Saturday when hackers stole 116,500 Kelp DAO Restaked ETH (rsETH) tokens worth about $293 million from Kelp DAO’s LayerZero-powered bridge and used them as collateral on Aave v3 to borrow wrapped Ether (wETH).

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Crypto analytics platform Lookonchain said the move created about $195 million in “bad debt” on Aave, which contributed to the Aave (AAVE) token tanking nearly 20% from $112 on Saturday at 6:00 pm UTC to $89.5 about 25 hours later. 

Lookonchain noted that some of the largest crypto whales to withdraw funds from Aave were the MEXC crypto exchange and Abraxas Capital at $431 million and $392 million, respectively.

Source: Grvt

Several crypto networks and protocols tied to rsETH or the LayerZero bridge have paused use of the bridge until the problem is resolved, including DeFi platform Curve Finance, stablecoin issuer Ethena and BitGo’s Wrapped Bitcoin (WBTC).

Aave has frozen several rsETH, wETH markets

Shortly after the Kelp DAO exploit, Aave said it froze the rsETH markets on both Aave v3 and v4 to prevent any suspicious borrowing and later stated that rsETH on Ethereum mainnet remains fully backed by underlying assets.

WETH reserves also remain frozen on Ethereum, Arbitrum, Base, Mantle and Linea, Aave said.

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This incident marks the first significant stress test of Aave’s “Umbrella” security model, which was introduced in June 2025 to provide automated protection against protocol bad debt while enabling users to earn rewards.

Related: Aave DAO backs V4 mainnet plan in near-unanimous vote

Earlier this month, the Bank of Canada found that Aave avoided bad debt in its v3 market by using overcollateralization, automated liquidations and other strategies that shifted risk to borrowers.

In comments to Cointelegraph, Aave defended its liquidation-based model, framing it as a core safety mechanism that protects lenders while limiting downside for borrowers.

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It comes as Aave parted ways with its longest-standing DeFi risk service provider, Chaos Labs, on April 6, following disagreements over the direction of Aave v4 and budget constraints.

Magazine: Are DeFi devs liable for the illegal activity of others on their platforms?