By Paul R. La Monica

Bearish investors had a lot to celebrate with worries about President Donald Trump's tariffs pushing the broader market lower this year, generating profits for short sellers.

But a temporary trade agreement between the U.S. and China sent stocks soaring Monday -- and now the shorts are getting squeezed.

Short sellers, who borrow stocks and sell them with the hopes prices will go down, may be forced to buy back shares to cover their positions before they lose a lot of money.

Shorts profit from the difference, or spread, between the price at which they first sold shares and the price at which they buy them back before returning them to the borrower. When a heavily shorted stock moves higher, shorts often have to buy in a panic. That's the squeeze.

"A major shift...will drive significant short covering and bearish hedge unwinding," said Ivan Feinseth, chief investment officer of Tigress Financial Partners, in a report Monday.

That seems to be taking place for small- and mid-caps in particular. The Russell 2000 and S&P MidCap 400 indexes each gained about 3.5% Monday, slightly more than the Dow Jones Industrial Average and S&P 500 large-cap indexes.

Melissa Roberts, an analyst with Stephens, noted Monday that the "bears didn't budge" in the past few weeks for smaller and midsize companies. Short interest, the amount of shares being held by short sellers, was 6.3% of small- and mid-caps as of April 30 versus just 1.8% for large-cap stocks.

Roberts pointed out that healthcare, energy, tech, and consumer companies had the highest levels of short interest among small- and mid-cap stocks.

Roberts highlighted stocks that recently had the biggest jumps in short interest as a percentage of outstanding shares, including software firm Klaviyo; food and beverage makers Vita Coco, Simply Good Foods, and Cal-Maine Foods; biotech 10X Genomics; and fracking sand transportation company Atlas Energy Solutions.

So investors might want to keep an eye on those stocks to see if short sellers look to hedge their bets in the event of more positive trade headlines.

There could be even more room to run for the market given that short interest levels increased for 10 of the 11 sectors at the end of April, according to Roberts.

The short squeeze may only have just begun.

Write to Paul R. La Monica at paul.lamonica@barrons.com

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May 12, 2025 16:29 ET (20:29 GMT)

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