What happened

Shares of American Airlines Group (NASDAQ:AAL) soared 10% higher on Wednesday morning, a day without any company news and when the rest of the airline industry was relatively quiet. It's hard to know for sure what is driving the stock higher, but my guess is it is getting swept up in the biggest story playing out on Wall Street right now.

So what

Markets are abuzz right now discussing the dramatic moves higher by stocks including GameStop and AMC Entertainment Holdings. Both stocks have shot higher in recent days in large part due to a Reddit discussion community known as WallStreetBets.

WallStreetBets has been targeting stocks unloved by investors, seeking out companies with a large number of their shares sold short. A short sale is a bet that a stock price will fall, and at times a stock can surge higher if bulls can create a short squeeze that forces shorts to cover their pessimistic bets.

An American Airlines plane emerges from a hanger.

Image source: American Airlines.

American Airlines is one such stock. About 171.3 million of its 610.8 million shares outstanding, or about 28%, are currently sold short, according to S&P Capital IQ. That compares to about 4.4% of United Airlines Holdings (NASDAQ:UAL) shares, 2.9% of Southwest Airlines (NYSE:LUV) shares, and 2% of Delta Air Lines (NYSE:DAL) shares.

Although there is nothing on the Reddit forum to suggest the WallStreetBets group has actively targeted American, I think it is likely that short sellers who are taking massive losses on stocks like GameStop and AMC Entertainment are cashing out of other positions as well. That is creating buy order demand for American shares, sending the price higher.

Indeed, as of 11:30 a.m. EST, about 75 million American shares have traded on the day. On a typical day about 100 million shares trade during the entire session.

Now what

Investors need to be cautious here. American was the most shorted airline for a good reason. While the company should have the cash reserves to survive the COVID-19 pandemic it entered the crisis as the weakest of the major airlines, and will likely need longer than most to recover.

I don't see American as a compelling buy right now compared to Delta or Southwest, but then again it seems dangerous to short the stock as the vaccine rollout speeds up even without external forces weighing on the shares.

The best thing for long-term investors to do is ignore the chaos playing out right now, and stick with buying strong companies and holding through the turbulence.

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.