What happened

After a fairly uneventful morning, shares of Tanger Factory Outlet Centers (SKT -1.65%) rose a dramatic 23% in afternoon trading on Tuesday. And it wasn't the only mall-focused real estate investment trust (REIT) to rocket higher, with The Macerich Company (MAC -1.53%) and Washington Prime Group (WPG) also getting in on the act, rising roughly 23% and 15%, respectively. None of these REITs put out any information that would have produced this kind of swift and synchronized rally. There was something else afoot.

So what

Over the past week or so, GameStop has garnered a huge amount of attention for the large and swift gains it has made. The reason is that short-sellers are reportedly being forced to cover their positions in what is known as a short squeeze. Essentially, investors sold stock they didn't own in the hope of buying it at a lower price to close out their position and book a profit in what's sort of like the reverse of a "normal" trade (in this case, sell high, buy low). But the stock didn't go down, it went up.

A mother and a daughter at a mall.

Image source: Getty Images.

When a stock being shorted goes up, short-sellers have to buy the shares at a higher price than they sold them for, and they lose money. At some point, short-sellers will give up on a losing position and start buying to limit their losses. If enough short-sellers do this at the same time, the stock can rally massively as they desperately try to close out their positions and limit the damage. It looks like Tanger, Macerich, and Washington Prime are getting caught up in this type of short squeeze.  

All three were punished by investors in the early days of the coronavirus pandemic, since their centers were effectively shut down by the government. Even though the economy has since started to reopen, for the most part, malls still face some serious headwinds. The pandemic is the most newsworthy right now, but before that, they were dealing with the so-called retail apocalypse, which isn't going away anytime soon. Adding to the problems, Macerich and Washington Prime both have heavily leveraged balance sheets

SKT Financial Debt to Equity (Quarterly) Chart

SKT financial debt to equity (quarterly) data by YCharts.

But the ongoing headwinds don't matter right now. Wall Street is in a feeding frenzy, and investors are acting on nothing more than whim and emotion. So these downtrodden mall REITs were heading higher today as shorts looked to cover their losing bets. To be fair, Tanger did receive an upgrade from a Wall Street analyst, but the $14 share price target is actually below the $16 or so that the stock was trading at as the closing bell drew near.   

Now what

Investors should tread with extreme caution here. The mall REIT space does have turnaround potential, but it will take more than a few hours for them to fix what ails them. In fact, it's highly likely that several more quarters, if not years, will pass before Tanger, Macerich, and Washington Prime have fully recovered from the pandemic's hit and the ongoing retail apocalypse. The market action today is a sign of the volatile and uncertain times on Wall Street, but not something that any long-term investor should try to read into.