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We have heard a number of people call Thursday's gain in the market a short-covering rally. Looking at the actual performance of stocks based on short interest, however, suggests otherwise. We divided the S&P 1500 into deciles based on each stock's short interest as a percentage of float.

As of mid-day Thursday, the 150 stocks with the highest short interest were up an average of 0.96%, which is only slightly ahead of the average return for all 1500 stocks in the index (0.95%). Additionally, the three deciles with the highest short interest were up an average of 0.85%, while the three deciles of stocks with the lowest short interest were up 1.05%. These kind of returns hardly indicate that shorts are scrambling to cover.

(click to enlarge)

Source: Short Covering Rally?