The surge in stock prices has triggered a brutal "short squeeze," causing short sellers to lose over $40 billion in just a few days.

According to data from S3 Partners, the stock market's hot performance in November has led to some hedge funds betting on a market decline to "suffer huge losses" of $30 billion.

Barclays' European equity strategy chief Emmanuel Cau said that short sellers have been caught in the "painful" rebound of "low-quality" stocks this month. Over the past year or so, many short sellers have been shorting companies facing higher borrowing cost risks. At the same time, the market is increasingly convinced that the Federal Reserve's interest rate hike cycle has finally ended.

The S&P 500 Index (SPX) rose more than 7% in November, on track to record the best single-month performance since July 2022.

Last week's lower-than-expected U.S. CPI data further boosted the stock market, with the S&P 500 Index and technology stock-focused Nasdaq Composite Index (NDX) both recording their best performance since April this year.

Analysts said the rise in stock prices triggered a brutal "short squeeze," with some hedge funds repurchasing stocks to cover their short bets, further driving up stock prices. Cau said:

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"The market this year has been very tricky, but this short squeeze did kill the year-end performance of many funds."

Argonaut Capital's Chief Investment Officer Barry Norris said that the "easing of the financial environment" in the past month may lead to some "dead cat bounces."

According to calculations by data group S3 Partners, from last Tuesday to last Friday, funds' short bets in the United States and Europe lost $43.2 billion, a calculation that does not take into account the potential gains from other stocks held by the funds.

S3's data shows that for hedge funds, the cost of shorting technology stocks, healthcare stocks, and non-essential consumer goods stocks is the highest. For example, the share price of cruise company Carnival (CCL) rose 14% in the week ending Monday, causing a total loss of $240 million for hedge fund short sellers.As market sentiment rapidly improves, indices tracking a large number of shorted stocks have rebounded significantly from recent lows. Goldman Sachs' highly significant Short Position Index is expected to reach its highest level since last October. This index tracks the total value of the 50 highest open short positions among the constituents of the S&P 500 Index.

In the meantime, on Tuesday, strategists at DataTrek Research pointed out that the correlation of large-cap U.S. stocks is a factor that will continue to push the stock market higher before the end of the year. The company's co-founders, Nicholas Colas and Jessica Rabe, stated:

"When investors feel the outlook is favorable and they are picking between individual sectors and stocks, correlations tend to be low. When investors are worried that a recession is brewing, regardless of the cause, correlations are high because they consider stocks as a very risky asset. In the current environment, everything can be sold. Most importantly, we believe that the U.S. stock market will continue to rise in the coming weeks."