Yes, "least bad" means "best", but it strongly implies all the options are bad or negative. It could also mean the options have both positive and negative attributes but only the (lack of) negative attributes are being considered (perhaps this fits your quote).
It does appear to be perfectly grammatical. It does, however, sound a little wrong to my ear.
Sorry this is largely conjecture, but here's my point-form essay on why "least bad" might sound jarring:
The word bad is used by children. ("the bad man"), or by adults talking to children ("That was a bad thing to do!").
Adults typically avoid the word bad through the use of litotes ("not good"), or by using more formal-sounding language ("underperforming")
When adults do call something bad, it's usually something abstract or impersonal ("bad news", "bad weather", "bad timing", "bad taste", "bad option")
The taboo on the word "bad" does not apply to "worst". ("worst man [for the job]", "worst thing [we could do]", "worst enemy", "worst fears", "worst case")
"least bad" is a rare case where the word "bad" is used in a comparison, avoiding the use of the irregular comparative/superlative forms: "worse" or "worst"
It sounds weird, because there is a taboo around saying childish-sounding words like "bad", and yet it's being used in a formal sense.
People say "least worst" because the meaning is understood (even if it's technically non-standard) and it doesn't break the taboo around the word "bad".
Now, having a look at the given quote:
...the least bad negative showing...
I'm not sure why it couldn't just be written "least negative showing". Perhaps it is the least bad of the negative showings? Perhaps it was written to avoid the phrase "least negative negative showing". I don't understand the context well enough to judge.
Elsewhere where I've seen the phrase "least bad option", it seems to be to emphasize that all the options are bad, and perhaps trying to grab attention by the odd sounding phrase (e.g. it's used in the title of a study, and in news headlines reporting the study).
Finally, here's a graph so you can evaluate for yourself which is the least bad of the options, by usage in books over the years: