Big Day for Bad Stocks

What did I miss? As the Dow Jones fell 40 points yesterday, some of the market's worst companies -- financial stocks either majority owned by the government or still drowning in losses -- scored utterly insane gains.

Have a look:

Yowzas. Why should these beleaguered names suddenly go berserk?  

They shouldn't. And that's why, if you're one of the fearless gamblers still seeking to pull a buck out of these companies, you'd be wise to clock your gains and move on.

AIG initially bounced on hope that its upcoming earnings report won't be as terrible as some thought, and on news that it's getting a new CEO. But that hardly explains the share-price explosion -- even if the insurer stops losing money, and regardless of who's in charge, it still owes taxpayers about $84 billion.

The most likely fuel behind the surge wasn't a newfound green shoot. It's short covering.

When investors short a stock, they borrow and sell shares they don't own. When they choose to close the short position out (short covering), they're forced to purchase shares in order to give them back to the investors who lent them. This buying activity can feed on itself if shares rise enough to cause other short-sellers to panic, or receive margin calls, forcing them to close their positions and buy shares. It's called a short squeeze. And it's likely what happened yesterday.

This happened to Volkswagen last fall: In what was described as "the mother of all short squeezes," the German automaker temporarily had one of the highest market values on the planet … only to come crashing back down to earth when the squeeze subsided.

Some of these financial shares are pure speculation -- bound to do unexplainable things -- but I'd expect a similar swoon in the coming days.

So, please, don't get too excited. If you were lucky enough to enjoy yesterday's bounce, take the money and run.

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