What happened

The stock market was having a somewhat negative day with the S&P 500 down by about 0.7% at 11:05 a.m. EST. However, several retail REITs are on fire. Outlet mall REIT Tanger Factory Outlet Centers (NYSE:SKT) and mall redevelopment company Seritage Growth Properties (NYSE:SRG) were higher by 10% and 12%, respectively, for the day, while mall operator Macerich (NYSE:MAC) was up by 23%.

So what

There isn't any company-specific news propelling these retail REITs higher today, but it's interesting to note that all three have two very specific characteristics in common. First, all three have been among the most beaten-down stocks in the real estate sector since the COVID-19 pandemic hit. And second, all three are big targets of short-sellers.

Shopper walking toward a mall door with bags in hand.

Image source: Getty Images.

In fact, as of December 31, nearly 50% of Tanger's float was sold short. Seritage had short interest of 39.9% on that same date. And Macerich has been the biggest short target of all, with 58.4% of shares sold short. In other words, investors have been placing big bets against these stocks.

Well, it looks as if there are some pretty big short squeezes going on in the market as the Biden administration gets started developing its stimulus plan and the COVID-19 vaccine rollout starts to accelerate. As an extreme example, video game operator GameStop (NYSE:GME), which actually had more than 100% of its float sold short, is up by 80% today alone.

For investors who aren't familiar, here's the general idea of how a short squeeze works:

  • Investors see a reason to bet against a stock. In the case of these three retail REITs, as the COVID-19 pandemic picked up in 2020, it was uncertain if malls would ever return to business as usual.
  • The stock starts to go up due to a business-related catalyst. All of these REITs have been sharply higher (before today's rally) since positive vaccine news started to emerge in November.
  • Short sellers begin to get margin calls or decide to close out their positions to limit losses. Since closing out a short position requires buying shares, this creates positive upward momentum in the stock's price, triggering even more short sellers to buy.

Now what

A short squeeze doesn't inherently change anything about a business or a stock's investment thesis for long-term investors, and it's not uncommon for stocks to pull back once the selling calms down.

With that said, there are some very real reasons for investors to be optimistic about the mall industry as the COVID-19 pandemic starts to (hopefully) wind down over the coming months. And this is especially true if we get trillions of dollars in new stimulus.

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.