What happened

Shares of watch company Fossil (NASDAQ:FOSL) increased as much as 13.6% on Friday. The stock is up 13.2% at the time of this writing. The stock's rise comes after shares fell on Wednesday in the aftermath of the company's third-quarter earnings release.

While it's not clear why Fossil stock is rising on Friday, there are several plausible theories. First, some investors may view the sell-off as a buying opportunity, helping the stock rebound. Second, and this could represent a large number of investors who were shorting the stock now covering their position, creating a short squeeze.

A chalkboard sketch showing a downward trending graph.

Image source: Getty Images.

So what

As of the end of October, Fossil Group short interest was nearly double where it was toward the end of last year. After a 75% decline in its stock price year to date, investors shorting the stock are likely pleased with their gains and ready to cover their positions.

Regarding Fossil's third quarter, investors were likely unimpressed with management's guidance for the important holiday quarter. Fossil guided for net sales to decline between 11.5% and 3.5% year over year.

Now what

Fossil's difficult market environment is likely to persist. It would be naive to overlook the enormous success Apple is seeing with its Apple Watch -- just ahead of the holiday season -- and fail to consider how this can impact Fossil. Apple Watch sales have seen unit growth of over 50% year over year for three consecutive quarters, and a new version of the Apple Watch was launched just before the holidays. As the world's top-selling smartwatch, it will almost certainly have a negative impact on Fossil's watch business, which accounts for 80% of the company's total revenue.