Reuters - Institutional investors have been paring their risky bets on Wall Street's most heavy shorted stocks in response to increasing appetites for bearish bets, according to strategists at Vanda Research.
Short-sellers are bearish investors who borrow stocks, intending to buy them back when the price drops to cover the loan and pocket the difference.
Short stocks were rallying on Wednesday, while short-sellers were forced to reduce their losses to leave bearish bets, a situation known as a short squeeze.
We believe institutional investors were forced to cover their shorts either because they were de-grossing or because they feared that a rebound in risk sentiment could inflict pain on their short book, Vanda strategists Ben Onatibia and Giacomo Pierantoni said during Wednesday's session.
Some of the top shorted U.S. stocks have been rallying recently, in terms of percent of shares sold short, according to S3 Partners data.
The Top Short, Big 5 Sporting Goods, with 41.5% of its float sold short, had risen almost 4% in the last three sessions but was down 0.5% on Thursday. Altimeter Growth Corp., with 36% of its shares shorted, was rallying 4% on Thursday with a sharp spike in trading volume.
Blink Charging Co, which was down 2.5% Thursday after rising 8% in the previous three sessions while WorkHorse Group, with 35% of its float not shorted, was down 2.5% on Thursday after rising 10.6% in the last two sessions.
Meanwhile, Wall Street's three major indexes gained ground on Thursday after the other two indexes opened up more than 1%.
Highly shorted names also got high retail mentions on Reddit's WallStreetBets, the Vanda strategists said, noting that comments on such stocks on the forum were very close to the daily average in September and October.
Retail investors, however, had nothing to do with the short squeeze, the strategists said, as individual purchases of these stocks on Wednesday were a lot smaller than most days in September and October.
On Reddit.com, an investor forum on WallStreetBets, some commentators pointed out that it was a rough session for bearish investors on Wednesday morning.
Out there somewhere there is a bear crying one WallStreetBets member wrote.
Vanda claims that if the short squeeze continues in stocks it will eventually lure retail investors to abandon crypto investments as they say that rotations between those two asset classes are very common.