How the stock market is getting a boost from short sellers

Big tech names drove the stock market’s massive gain in the first half of the year. As the breadth of the market rally broadens, another group is contributing to the increase too: heavily shorted stocks.

Upward market movements have been exacerbated by shorts sellers who made bets to the downside on those stocks, forced to cover their positions. Short covering refers to the practice of buying back borrowed shares to close out an open short position.

“As expected, shorts are getting squeezed in these losing trades and we are seeing short covering in these stocks — helping drive stock prices even higher alongside the momentum long buying we are seeing in these stocks,” Ihor Dusaniwsky, managing director of S3 Partners, told Yahoo Finance on Wednesday.

Shares of crypto platform Coinbase (COIN) and car-selling platform Carvana (CVNA) are some of the biggest outperformers over the past month.

Carvana stock is up more than 90% in the past month. REUTERS/Brian Snyder

Coinbase stock is up 70% over the last month while Carvana stock is up 91% over the same period. Short interest on both of those stocks currently sits above 20% and 54% of the float respectively, according to data analytics firm S3 Partners. (For perspective, these stocks are above the average for the US market of 4.99% short interest.)

Other short-seller favorites include artificial intelligence firm (AI), up 10% in the last seven sessions and a whopping 259% year to date.

Even shares of EV maker Rivian (RIVN) have been on fire lately, fueled in part by short squeezes.

The S&P 500 (^GSPC) is up 16% year to date, while the Nasdaq Composite (^IXIC) is up 32% with much of the rally initially focused on a handful of tech names amid a frenzy over artificial intelligence, a rotation out of heavily beaten financials in March, and expectations that the Federal Reserve would pause its rate hikes as inflation cools.

The market breadth has been slowly widening with stocks outside of tech like GE (GE) and home improvement retailer Lowes (LOW) recently hitting 52-week highs.

The higher markets go, the bigger the risk for short sellers.

“With stocks rallying, expect the short squeeze to tighten in these stocks and buy-to-covers helping boost stock prices as shorts trim or exit their trades entirely,” said Dusaniwsky.

Ines is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre

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