What happened

Stock market volatility continued on Monday, with previously hot stocks like Bed Bath & Beyond, National Beverage, and GSX Techedu all plummeting to start the week. As of 1 p.m. EST, Bed Bath & Beyond stock was down 16%, National Beverage stock was down 16%, and GSX Techedu stock was down 9%. And it might be because short-squeeze mania is starting to cool off.

So what

While many people probably already know, here's a quick recap of what's been going with GameStop stock over the past couple of weeks. More investors were betting against GameStop stock than any other stock on the market by selling shares short. But a group of retail investors noticed that, because short interest was over 100%, they could spark a massive short squeeze by buying shares of GameStop in concert. GameStop is a multibagger many times over so far in 2021. Therefore, the plan is working, at least for now.

A person watches a red arrow going down and breaking through the floor.

Image source: Getty Images.

Once the GameStop short squeeze started in earnest, short-squeeze mania was born. In other words, all stocks with a lot of short interest immediately became desirable to a multitude of traders. This included consumer goods stocks like Bed Bath & Beyond, National Beverage, and GSX Techedu. Consider the short interest for each:

Company Shares short* Percent of float Days to cover
Bed Bath & Beyond (NASDAQ:BBBY) 74.9 million 82% 6.3
National Beverage (NASDAQ:FIZZ) 7.3 million 63% 22.3
GSX Techedu (NYSE:GSX) 64.7 million 77% 15.1

*As of Jan. 15. Data source: Yahoo! Finance. 

The returns from these three stocks were stellar in January, demonstrating just how much demand there was for shares of these companies from traders looking to make a quick profit from the short-interest situation.

GSX Chart

January returns for Bed Bath & Beyond, National Beverage, and GSX Techedu compared with the S&P 500. GSX data by YCharts

However, it seems enthusiasm is now starting to die down. Many of these short-squeeze stocks are selling off today, including GameStop itself. Furthermore, GameStop was a bit of a unique scenario because, while possible, it's rare for short interest to exceed 100%. It's much easier for short-sellers to get out of other short positions faster than GameStop. Therefore, it was always logical to conclude that any other short squeeze would be shorter lived and less dramatic.

Now what

Nothing is for certain, but there are two real possibilities for Bed Bath & Beyond, National Beverage, and GSX Techedu stocks going forward. First, assuming they're not over yet, these stocks could climb further if the short squeezes intensify. Second, all three of these stocks could dramatically plummet once the squeeze is over and demand for these stocks dries up. 

A hand squeezes a ball with a smiley face on it.

Focusing on the long term can help you stay calm throughout the volatility of a short squeeze. Image source: Getty Images.

Here's how I suggest handling the uncertainty: Personally, I own three stocks (not the three mentioned here) that appear to have been squeezed some already and could still squeeze further. I recognize they could fall when the squeezes are over, but I also recognize this short-term factor isn't something I can predict or control. I don't know where or when the top of the squeeze will be -- no one does. Therefore, I believe it's best not to buy these stocks expecting them to pop in the short term. And it's also best not to sell stocks you believe in for the long term, trying to time the drop. 

Additionally, keep in mind that investors sell stocks short when there's a compelling bear case against the companies in question. That's the case here. Bed Bath & Beyond is just starting a business turnaround plan because, frankly, its business results were headed the wrong way. For its part, National Beverage's revenue growth has slowed, and investors question the long-term consumer demand for sparkling water beverages, like the company's LaCroix brand. And GSX Techedu has been accused of fraud by short-sellers. While its management denies this and is working with the Securities and Exchange Commission, these allegations still understandably make some investors nervous. 

You should know the bear case for the stocks you own. That said, this doesn't mean the bears are right. It's possible to come to a contrarian conclusion after doing your own due diligence. Bears often get it wrong by thinking too short term. Therefore, if your research leads to believe the bears do have it wrong, that could be a good reason to go long. After all, really the only reason you should ever buy a stock is when you believe in a long-term thesis. Anything else is a risky gamble.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.