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."

Read More Gold's doing something it hasn't done since 1998

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.

Read MoreThis 'under-loved' sector could soon rally: Technician

"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.

Want to be a part of the Trading Nation? If you'd like to call into our live Wednesday show, email your name, number, and a question to TradingNation@cnbc.com


Trades to Watch

Trader Bios


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.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more