What happened
Shares of Fossil (FOSL +3.48%), Bed Bath & Beyond (BBBY +0.00%), and Macy's (M +2.80%) soared 87%, 43%, and 12%, respectively, on Wednesday, as traders bid up the prices of many high short-interest stocks.
So what
A crowd of individual investors has piled into highly shorted stocks in recent days with the goal of igniting steep increases in their prices. They hope to pressure short-sellers -- traders who have placed bets that generate profits if a stock's price falls -- into bailing out of their trades.
These so-called short squeezes can drive stocks' prices even higher due to the dynamics of short-selling, which requires traders to buy the shares they sold short to close their positions.
The bulls are battling the bears in a host of heavily shorted stocks. Image source: Getty Images.
After pummelling short-sellers who bet against companies like GameStop and AMC Entertainment, these bear-hunters now appear to be driving up the prices of other highly shorted stocks, including Fossil, Bed Bath & Beyond, and Macy's.
Now what
Despite their gains on Wednesday, these downtrodden retail stocks remain high-risk investments. The threat posed by e-commerce to traditional retailers did not suddenly disappear. Macy's, Bed Bath & Beyond, and Fossil still face enormous challenges as they struggle to adapt to changing consumer preferences.
Moreover, short squeezes eventually end. When they do, stock prices tend to move toward valuations that reflect the fundamental performance of their underlying businesses. For Bed Bath & Beyond, Macy's, and Fossil, those prices are likely far below where their shares now trade.
