What happened

Shares of MercadoLibre (NASDAQ:MELI), the Argentine e-commerce star, have been inching up in price for the past three days -- but Tuesday's morning trading was something out of the ordinary. This morning, MercadoLibre stock jumped more than 5% initially, and it's holding onto the bulk of those gains (4.3%) as we round the clock into 11:30 a.m. EDT.

But why?

Arrow angles up on a green stock chart.

Image source: Getty Images.

So what

MercadoLibre stock has been a star performer in 2020, gaining nearly 140% in the last 52 weeks of trading. Such astounding gains have driven up the international stock's valuation to extreme levels, however -- 2,900 times trailing earnings, reports Yahoo! Finance.

This fact has not gone unnoticed among short-sellers, who have sold short 4.9% of all MercadoLibre shares outstanding in anticipation of buying them back for big profits after the stock inevitably falls.

Now what

And yet, in a report that came out just yesterday, market research firm S3 Partners warned that investors who have sold MercadoLibre shares short are at risk of suffering a "short squeeze." Indeed, this squeeze has already begun, with MercadoLibre's rising share price forcing short-sellers to "cut their exposure by -12% as MELI's stock price rose +22%" over the last 30 days, reports StreetInsider.com.

Adding to the "shorts'" panic, analysts at New Street Research just reinstated their coverage of MercadoLibre stock with a buy rating and a $1,450 price target -- more than 8% above where the shares trade today. Judging from today's 5% rise in share price, it seems S3 was right to warn investors about the perils of shorting a growth stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.