"So much of today's rally took place on the backs of hedge funds who were poorly positioned going into the sell-off on Friday," the "Mad Money" host said. "So they overcompensated by shorting anything related to the coronavirus right into the teeth of the downturn."
Except it has not really worked to plan, Cramer said, even as new cases of the deadly coronavirus grow by the thousands each day.
Part of that is because the Chinese central bank has pumped more than $200 billion into the country's financial system to prop up asset prices, Cramer said.
But the other reason shorts are being squeezed, Cramer said, is that it turned out there was not that much actual stock for sale.
"Instead we only really had sellers of the S&P  futures and they stopped once we got a sense that the Chinese have gotten the situation ... under control," Cramer said. "It looks like China will be back to work next week, and that's huge."
Short sellers borrow shares from an investment bank and then sell them, with hopes the stock will decrease in value. If that happens, the short sellers buy the shares back at the cheaper price and give them back to the bank, turning a profit on the difference.
Wynn Resorts and Las Vegas Sands, both casino companies, have a lot of exposure in the Chinese territory of Macao, Cramer explained, so investors may have bet that operations would need to be curtailed as the coronavirus spread.
That is ultimately what happened, Cramer said, but it did not end up hurting the companies' stocks. Both closed more than a percent higher Tuesday.
"When the longs, the current shareholders, saw the news, they didn't freak out like the short sellers needed," he said. "Many of those owners ... are index funds, and they never sell anyway. Others probably think the worst is over."
"Either way, it's extraordinary that something bad happened to these Macao gambling names and there was a shortage of major sellers," he continued.
Nike is a company that "seemed like an obvious loser from the coronavirus epidemic," said Cramer.
"If the Chinese economy's in trouble, shorting Nike should've been like shooting fish in a barrel," he said. "I mean, talk about an obvious short."
But instead Nike has received two analyst upgrades this week, and new CEO John Donahoe is set to discuss the company's standing in China.
And by that, Cramer said he means Donahoe will talk about Nike's large technological advantage, not the coronavirus.
"A good short spoiled," he said.
Nike finished up 2.1% on Tuesday to close at $101.38.
Tesla closed up 13% Tuesday, one day after rising nearly 20%. This continues a months-long rise for the stock that has been "a short seller's worst nightmare," Cramer said.
Tesla shorts have lost $5.7 billion in just two days.
"The shorts will keep getting squeezed until some natural sellers finally surface," Cramer said.
But so far, that has not happened.
Instead, Cramer said hedge funds — which typically have short positions to minimize the risk of their long positions — are experiencing damage as the market rallied the past two days.
"These shorts are getting annihilated, because they have to have shorts, and now they've become rocket fuel for the market," said Cramer, a former hedge-fund manager.
"They are desperate for something bad to happen, anything. They just need panic. They're hoping you will panic," he continued. "But the natural sellers from last Friday, suddenly they are nowhere to be found."