Wall Street's highly shorted stocks rally after a rebound in risk sentiment

Oct 14 Reuters -- Wall Street's highly shorted stocks rallied on Wednesday as institutional investors pruned their short bets due to a strong rebound in risk sentiment, strategists at Vanda Research said in a note.

The U.S. stocks are up more than 1% on Thursday, building on the previous session's gains led by huge growth names like Amazon.com and Microsoft.

We believe institutional investors were forced to cover their shorts, either because they were degrossing or because they feared a rebound in risk sentiment could inflict pain on their short book, Vanda strategists Ben Onatibia and Giacomo Pierantoni said.

Nikola Corp., Workhorse Group Inc, Qualtrics International and Canoo In — among stocks with high free float interest as a percent of short float, as per data from S 3 Partners — have rallied between 8% and 11% this week.

The high retail names also got high mentions on Reddit's WallStreetBets said, strategists said, noting that comments on such stocks on the forum was very close to the daily average in September and October.

Retail investors however, had nothing to do with the short squeeze, the strategists noted, as individual purchases of these stocks on Wednesday were a lot smaller than most days in September and October.

Short sellers are bearish investors who borrowed an asset in hopes they can buy back the asset when the price falls, to cover the loan and pocket the difference.