After absorbing a US$20 billion hit, bears appear to have started covering their GameStop Corp. positions in earnest as the stock plunges.

Short interest in the video-game retailer plummeted to 39 per cent of free-floating shares, from 114 per cent in mid-January, according to IHS Markit Ltd. data. Data from S3 Partners, another market intelligence firm, showed a similar pattern, with GameStop’s short sales having fallen to about 50 per cent of its total stock available to trade, down from a high of roughly 140 per cent reached earlier this year.

GameStop sank 29 per cent as of 10:54 a.m.m in New York, after rallying 1,600 per cent in January. Hordes of day traders piled into the shares after noticing the elevated short interest in hopes that buying would force shorts to cover, driving the price ever higher. Now the trend is reversing.

While itself volatile, the short data is potentially an early sign that the short squeeze that propelled GameStop over 1,600 per cent higher in January has progressed. Reddit day traders’ success igniting its shares evolved into a strategy of targeting the market’s most-hated companies, sending the likes of Koss Corp. and AMC Entertainment Holdings Inc. soaring as well.

“Short squeezes can only last as long as there is a large short position in a stock. Once that dissipates, the situation changes completely,” said Matt Maley, chief market strategist at Miller Tabak & Co.

To be sure, discerning the motives and actions of short sellers in real time is a fraught exercise, particularly given the variety of information that exists tracking them. Certain views can be asserted around the present data, however.

One, that the level of bearish bets, after staying largely unchanged for days, appears to have started falling around Thursday. That was also the day the Robinhood investing app imposed restrictions on new purchases in stocks including GameStop -- a fact that may sit uncomfortably with retail traders who believe Wall Street closed ranks against them.

Thursday was, on the other hand, a moment of extreme volatility in the video-game retailer, a day in which its shares traded between US$112.25 and US$483. Swings like those are likely to have made any thesis on the stock -- short or long -- harder to manage. They also may have put fresh short bets -- ones taken in the first few days of last week -- into the money.

Still, at 50 per cent of shares outstanding, GameStop’s short rate remains elevated compared to most of the rest of the market and may have to fall further before the squeeze is over.

“It signals that a short squeeze has begun in earnest and most probably will continue if GameStop’s stock price stays at these levels or rises more,” Ihor Dusaniwsky, managing director of predictive analysis at S3 Partners, said by email. “The short squeeze is over when the shorts that are left are comfortable with their positions and price expectations for GameStop.”

AMC added 5.8 per cent, while Koss plunged 39 per cent.

January’s histrionics propelled the market’s most-hated shares to their best month ever, with an equal-weighted basket of the 50 most-shorted Russell 3000 Index stocks jumping over 40 per cent. The most expensive-to-borrow U.S. equities outperformed the least costly by 29 per cent in January -- also a record, according to a report from IHS Markit. Even with GameStop and AMC removed from the analysis, the return from expensive to borrow shares was still greater than 25 per cent.

“This moment is historically remarkable and, like so many financial time series, the returns for heavily shorted U.S. equities will likely be measured against the last 12 months for some time to come,” Sam Pierson, Director of Securities Finance at IHS Markit, wrote in a report Friday.

--With assistance from Elena Popina.