Some of the biggest fortunes in stock market history were made when everyone thought a stock was going down.

Then it didn’t.

Instead, it ripped higher, forcing traders who had bet against the stock to rush in and buy shares just to stop the bleeding.

That buying pushed prices even higher, which forced even more buying.

This chain reaction is called a short squeeze.

And when it happens, stocks don’t just rise. They explode.

Short squeezes are some of the most exciting and lucrative events markets ever produce.

If you’re on the right side, the gains can be massive.

If you’re on the wrong side, losses pile up fast.

We’ve seen this movie before.

Take Volkswagen back in 2008.

In just two days, shares rocketed from under €200 to over €1,000 as short sellers desperately tried to buy back shares that barely existed.

For a brief moment, Volkswagen became the most valuable company in the world.

Or Tesla from 2019 through 2021.

Tesla went from one of the most heavily shorted stocks in America to one of the biggest winners in market history.

As the company kept executing and the stock climbed 700%, short sellers were forced to cover their positions.

That buying pressure poured gasoline on the rally.

And the most famous squeeze of all might be GameStop in 2021.

Massive short interest collided with aggressive buying, triggering one of the wildest squeezes Wall Street has ever seen.

Shares ran from under $20 to nearly $500 in a matter of weeks, vaporizing hedge fund positions and creating overnight fortunes.

These moves aren’t gradual.

They’re violent. Fast. And incredibly profitable if you’re on the right side.

And now, conditions are lining up for something similar.

This time, the setup is forming in software stocks.

Over the past several months, investors have dumped software stocks on fears that AI platforms like ChatGPT, Claude, and Gemini will replace traditional enterprise software.

• Microsoft currently has roughly 58 million shares sold short, near the top of its five-year range.

• Salesforce has about 18 million shares short, close to record levels for the stock.

• Oracle, Adobe, ServiceNow, Palo Alto Networks, and Zscaler are also seeing short interest near the upper end of historical norms, with 2% to 7% of shares outstanding currently being bet against.

In other words, a lot of traders are positioned for these stocks to fall further.

Here’s the problem for them.

These companies are still profitable, deeply embedded in enterprise workflows, and continue to grow.

If results simply come in “less bad” than feared, or sentiment stabilizes even slightly, short sellers may rush to cover.

And when short sellers start buying, prices can rise quickly.

That rise forces more covering. Which pushes prices higher still. And then suddenly you have the kind of momentum surge that we saw previously in Volkswagen, Tesla, and Gamestop.

Now, this doesn’t mean every software stock is about to go vertical tomorrow.

Some companies will struggle as AI competition is real and volatility isn’t going away.

But when heavily shorted stocks stop falling and sentiment begins to shift, the rebound can happen faster than most investors expect.

Software stocks may not be there yet, but the setup is starting to look familiar.

And that’s usually when things get interesting.