Some of the biggest winners in the stock market right now happen to be traders' most-hated names, a phenomenon that speaks to a speculative frenzy heating up on Wall Street. The top 10% of stocks in the Russell 3000 with the highest short interest as a percentage of float have by far been the best performers this year, up an average of 14.16%, according to Bespoke Investment Group. In comparison, the S & P 500 is only up 0.3% this year. Short interest is the number of shares that have been sold short but have not yet been covered or closed out. A high level of short interest shows overall bearishness on the stock, mostly from hedge funds. However, when animal spirits run wild, these risky investments can trigger a "short squeeze" where hedge funds have to rush in to cover their bets against the stock, fueling the rally even more. It doesn't take much to trigger a squeeze in this type of environment and sometimes it takes nothing at all. Earlier this week, GameStop with 144% of shares sold short, experienced a massive rally. Shares soared 57% on Wednesday to a record high after the video game company announced that Chewy co-founder and former CEO Ryan Cohen is joining its board. The stock surged another 27% on Thursday. While a rush of short covering exacerbated GameStop's rally, a Bank of America trader noted the move appeared to have a cascading effect on other out-of-favor names. "It is a dynamic that's been happening often for the past year, since the March lows," said a note from the bank's trading desk on Thursday. "Shorts have generally outperformed longs since the March 2020 lows." Another recent big winner Bed Bath & Beyond is also one of the most hated stocks. Its 40% gain this year so far came despite of its disappointing earnings. Earlier this month, Bed Bath & Beyond reported a fiscal third-quarter sales decline of 5% amid store closures and divestures during the pandemic. Its earnings also fell short of expectations. Other heavily shorted stocks SunPower, Gogo and Macerich have also climbed more than 30% each in 2021. The jump in these stocks with high short interest is another sign that speculative investors are chasing the rally everywhere. Many on Wall Street is also paying careful attention to bitcoin for signs of exuberance. The volatile cryptocurrency briefly topped $40,000 apiece last week and is now trading around $36,000. — CNBC's Michael Bloom contributed reporting.
