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Wall Street's most hated stocks are surging

Here's another reason for traders to dislike the stocks they already hate...

Of six of the most-shorted stocks in the S&P 500, four have surged this quarter, seeing double-digit gains and outperforming the broader stock market rally. The winners are GameStop, Transocean, ADT and Mattel.

When traders go short stocks, they are hoping to profit from a stock's decline by selling borrowed shares. But when such companies see a jump in share price, those shorts work against the investor, and in order to avoid further losses, short sellers are forced to buy those shares back and close out those short positions.

That buying pressure can cause a stock to rally — known in trader parlance as a "short squeeze." And that appears to be happening with several stocks.

"It can actually be a big contrarian indicator," Gina Sanchez of Chantico Global said Friday on CNBC's "Trading Nation." "If any of those companies do particularly well, they're coiled up so they can have a big bounce."

GameStop, which tops the list with 45 percent of outstanding shares held as shorts, has risen more than 38 percent for the year. As the outperformer builds momentum going into holiday season, it could see an even bigger boost thanks to high short interest in the stock, according to technician Rich Ross of Evercore ISI.

"If we break above $48 a share here, you have a confirmed base breakout ahead of the holiday season, which should be a peak time for video game sales," Ross said Friday. "I also like the concept of that high short interest, which could add fuel to the fire of a potential breakout."

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Aside from GameStop, other heavily shorted names have taken a considerable tumble this year. Rounding out the list of six are Chesapeake Energy and Fossil, which have plunged 62 percent and 50 percent respectively year to date.

One new favorite stock to short since August is Mattel, which has fallen 20 percent year to date. Analysts expect the toy manufacturer to continue to struggle with brand improvement, product licensing and headwinds from a stronger U.S. dollar.

Mattel also reported disappointing earnings for the third quarter in October. However, the stock is up almost 17 percent since this quarter began.

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"Mattel's sales declined in 3Q15 for the eighth consecutive quarter and inventories rose from the prior year. Management has tried to reduce inventories and revive sales by improving brand recognition and introducing new products, but has yet to achieve the expected results," John Staszak of Argus Research wrote in an October report, maintaining a sell rating on the stock.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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