Any time the market has a big up day like it's having today (so far at least), you inevitably hear that it's a "short-covering rally." We've already heard it multiple times on the financial news networks, so we checked to see if this is actually the case or if it's just a cop-out explanation.
Below we have broken the Russell 1,000 into deciles (10 groups of 100 stocks each) based on each stock's short interest as a percentage of float. The 100 stocks in the first decile have the highest short interest as a percentage of float, while the 100 stocks in the last decile have the lowest short interest as a percentage of float.
As shown in the chart below, the decile of stocks with the lowest short interest levels are actually averaging a bigger gain today than the decile of stocks with the highest short interest levels! You can see in the chart that the five deciles with the lowest short interest are outperforming the five deciles with the highest short interest, so this definitely doesn't appear to be a short-covering rally.
What's really happening today is investors are buying up the stocks that got hit hardest over the last few days. When we broke up the Russell 1,000 into deciles based on performance from 10/4 to 10/9, we found that the decile of stocks that were down the most over this time period are up more than any decile today by quite a bit. Conversely, the stocks that went down the least from 10/4 to 10/9 are up the least today.