Squeezes: Definition, How They Work, Types, and Examples

What Is a Squeeze?

The term "squeeze" is used to describe a variety of financial and business situations, typically involving some sort of market pressure. In business, it can be a period when borrowing is difficult or when profits decline due to increasing costs or decreasing revenues. In the investment world, the term can describe situations in which short sellers purchase stock to cover losses or when investors sell long positions to take capital gains off the table.

How Squeezes Work

The term squeeze is used liberally in finance and business and describes various situations in which people are realizing losses, taking gains, or finding credit difficult to obtain.

Several types of squeezes—including profit squeezes, credit squeezes, short squeezes, long squeezes, and bear squeezes—are explained below. Squeeze situations are often accompanied by feedback loops that can make a bad situation worse due to market psychology.

Types of Squeezes

Profit Squeeze

A business can face a profit squeeze when its profit margins have decreased or are decreasing. This type of squeeze happens when a company's revenue declines or its costs rise and it is unable to raise prices accordingly. The underlying causes of a profit squeeze are numerous but commonly consist of increased competition, changing governmental regulations, and expanding producer and supplier power.

Credit Squeeze

A credit squeeze describes a situation where it becomes difficult for businesses to borrow money from lending institutions. This type of squeeze can happen when an economy is in a recession or when interest rates are rising. For example, the excessive issuance of bad debt, as occurred before the 2007-2008 financial crisis, can cause a recession and, with it, a credit squeeze (commonly known as a credit crunch).

Rising interest rates can occur in the U.S. when the Federal Reserve deems that the economy is strong enough, and consumer confidence is high enough, to increase the federal funds rate, which in turn causes the prime rate charged by banks to rise. That makes it more expensive for businesses to borrow, sometimes prohibitively so.

A credit squeeze can thus happen in either a down market or an up market.

Short Squeeze

A short squeeze is a common scenario in the equities market where a stock's price increases and its purchase volume spikes because short sellers are exiting their positions and cutting their losses.

When an investor decides to short a stock, they are betting that the price will decline in the short term. But if the opposite occurs, the only way for them to close their position is to go long by purchasing shares of the stock. This can cause the stock's price to further increase, resulting in further action by short sellers.

Long Squeeze

A long squeeze occurs in a strong financial market when there are sharp price decreases and investors who are long a stock sell a portion of their position, pressuring more long holders of the stock into selling their shares to protect against a dramatic loss. This normally happens because investors place a stop-loss order to mitigate risk and ensure they are protected against any price declines.

Even when prices are increasing, they often do so with volatility, and short downward swings can trigger the sell order.

Bear Squeeze

A bear squeeze is a situation that happens when traders agree to sell a security in the future at the present price. Expecting the price to decline, they sell the shares in the present, expecting to buy them back at a lower price in the future to be able to sell them again to complete the prearranged sale and profit.

However, in a bear squeeze, the price rises, forcing the traders to buy the securities as soon as possible to not be further hurt by rising prices. As with the short squeeze, this creates a feedback loop that pushes the price higher.

Other Types of Squeezes

A liquidity squeeze occurs when a financial event sparks concerns among financial institutions, such as banks, regarding the short-term availability of money. These concerns may cause banks to be more reluctant to lend out money within the interbank market.

As a result, banks will often impose higher lending requirements in an effort to hold onto their cash reserves. This cash hoarding can cause the overnight borrowing rate to spike significantly above the benchmark rate, and as a result, the cost of borrowing will increase.

A financing squeeze is when would-be borrowers find it difficult to obtain capital because lenders fear making loans. This often leads to a liquidity crisis if there is little cash on hand and not enough operating cash flow. Individuals can also face a financing squeeze if they need to borrow and are unable to.

Some Examples of Squeezes

GameStop Short Squeeze

In January 2021, a post on a page of the online forum Reddit's subreddit channel r/wallstreetbets caused a short squeeze of the video game retailer GameStop's stock. The stock reached a pre-market value of more than $500 per share, which had multiplied over 30 times since its starting stock price of $17.25. Cumulatively, GameStop's short sellers lost $5.05 billion.

Great Depression Credit Squeeze

The stock market crash of 1929 caused a financial frenzy in the United States. The first bank runs occurred in the fall of 1930 in Nashville, when account holders rushed to withdraw all of their funds at once from the bank. Quickly, this credit squeeze spread across the U.S., causing many banks to liquidate their loans to appease their depositors, leading to multiple bank failures.

New York's Bank of the United States had more than $200 million in deposits at the time when it collapsed in 1931, making it the largest bank failure in American history up to that time. With the banking industry in trouble and depositors demanding their money, there was a drastic reduction in lending as banks hung on to cash to fight for their survival.

Silicon Valley Bank Squeeze

The collapse of Silicon Valley Bank in March 2023 illustrated several types of squeezes. First, the bank faced a profit squeeze due to poor returns from its investment portfolio.

Then jittery depositors rushed to withdraw their money in a modern-day version of a bank run, forcing it to liquidate a substantial portion of its investments at a loss.

That caused fears of a domino effect in which other banks would fail, creating a nationwide credit squeeze. The federal government quickly stepped in to assure depositors that their money was safe, even beyond normal Federal Deposit Insurance Corporation limits, which defused the situation.

Long Squeezes Within Apple

Long squeezes are not as dramatic to the market as short squeezes but can be witnessed by looking at the intraday charts of any large stock. Stocks will always fluctuate day to day, whether or not there is any new news coming out about a company.

For example, in looking at this 1-minute intraday chart of Apple, the price rallies, but without any concrete news or data triggering the selloffs. Instead, the long squeezes were quickly met with stock buys, meaning that the dips were caused by panicked shareholders taking profits and cutting losses.

The Bottom Line

Squeezes describe different types of financial and economic situations in which market pressures affect the value of investments or the availability of credit, among other impacts. As history has shown, squeezes demonstrate just how sensitive financial markets can be, from the Great Depression in the 1930s to GameStop and Silicon Valley Bank in the 21st century.