THE MOTHER OF ALL SHORT SQUEEZES

How $1 Trillion Vanished in a Week (And Why the Real Fun Hasn’t Even Started)

There’s a famous line from the 2008 financial crisis.

A trader at Lehman Brothers, watching his screen turn red, looked at his colleague and whispered:

“We’re not in a correction. We’re in a liquidation.”

The first week of February 2026 just became the largest notional short selling event in US equity history.

Microsoft dropped 26%. Oracle got gutted by 56%.

The entire S&P 500 software index lost $1 trillion in market cap in seven trading sessions.

To put that in perspective: That’s more wealth destroyed than the entire GDP of Indonesia. Gone in a week, poof.

The craziest part? Friday saw an explosive reversal.

The most-shorted stocks ripped 8.8% higher. Everyone exhaled, crisis averted and the bottom was finally in.

But here’s the part that should either terrify you or get you unreasonably excited (depending on which side of this trade you’re on):

Friday’s rally only unwound 20% of the short positions.

That means 80% of the powder keg is still loaded and ready to blow.

We are either about to witness the most violent short squeeze since Volkswagen in 2008, or we’re headed for another leg down that makes last week look like a dress rehearsal.

Let me explain how we got here and which way I think this thing breaks.

The Catalyst: When AI Declared War on Software

The proximate trigger for the massacre has a funny name: The Claude Crash.

On January 27th, Anthropic dropped what they called a relatively minor product update.

Claude Cowork got industry specific plug ins. Then they released Claude Opus 4.6, a model that can coordinate teams of autonomous AI agents.

Translation: Your $50,000/year enterprise software subscription just got replaced by a $20/month AI assistant that doesn’t need coffee breaks or complain about open floor plans.

The market responded with the financial equivalent of a full-blown panic attack.

Microsoft fell 26% from its peak. Palantir lost 25% of its value. Oracle got absolutely murdered by 56%.

And the iShares Expanded Tech-Software ETF (IGV) plunged 28%, with its RSI hitting 19, the lowest reading since the 2011 debt crisis.

For context, an RSI below 30 means oversold.

An RSI at 19 means someone call an ambulance. Actually, call the coroner.

Then OpenAI, never one to miss a chance to steal headlines, piled on.

They released their own coding assistant that goes beyond programming into documentation and presentations.

Basically, they looked at the software carnage and thought, You know what this fire needs? More gasoline and maybe some fireworks.

Some analysts like Gartner tried to calm everyone down, saying predictions of a “SaaSapocalypse” were overblown.

Their argument: These AI tools automate manual work, but they don’t replace critical SaaS operations.

The market heard them and just didn’t care. The market wanted blood.

When Wall Street Smells Blood, It Doesn’t Just Watch, it Feasts.

According to prime brokerage data, hedge funds didn’t just sell, they short-sold at a pace not seen in modern markets.

The numbers are absolutely bonkers.

Notional short selling in US single stocks was the largest on record since data began in 2016.

It was a +3.2 sigma event (translation for normal humans: this basically never happens).

Short sales outpaced long buys at a ratio of 2.5 to 1. In tech specifically? Short sales beat long buys at an astonishing 5.4:1 ratio.

For every $1 hedge funds were buying tech, they were shorting $5.40.

Let that sink in while I pour another drink.

And unlike past selloffs where shorts cover on the way down (taking profits like sensible people), hedge funds actively increased their short positions into the weakness.

Microsoft, historically a stock where shorts cover during declines was now trading like a “momentum-driven, distressed name.”

(That’s Wall Street speak for: “We think this thing is going to zero and we’re betting the farm, the tractor, and our kid’s college fund on it.”)

TeraWulf had over 35% of its float sold short. Asana sat at 25% short interest. Dropbox hit 19%.

The carnage was biblical.

The aggregate net exposure in software as a percentage of hedge fund books fell to a record low of 2.6%.

Hedge funds are now more short software relative to their entire portfolios than at any point in recorded history.

This is the setup for either:

(A) The mother of all short squeezes, or

(B) Hedge fund managers finally getting their I told you so”= moment after being wrong for two years straight.

But the software massacre was just the opening act.

The Bull Case: This Setup Is Almost Too Perfect

The setup is textbook. Record short positions (largest ever recorded).