Short-sellers have been the 'secret ingredient' to the market's Covid rally, says Jim Cramer

• CNBC's Jim Cramer called short-sellers the "secret ingredient" to the stock market's continued rally after last year's Covid sell-off.
• ""The invisible cover of their defeat is evident every day in this market and it's something we don't talk about enough," the "Mad Money" host said. '
• "Until something happens that truly panics the bulls, creating natural sellers, this is going to be a very tough environment for the shorts," Cramer added.

CNBC's Jim Cramer said Thursday short-sellers have helped propel Wall Street's robust rally from its pandemic-driven sell-off, calling the cohort of bearish investors the "secret ingredient" to the stock market's success since late March 2020.

"Just like ordinary investors will throw in the towel and sell when their favorite stocks get obliterated, short-sellers throw in the towel when their favorite targets go up too much," the "Mad Money" host said, shortly after the Dow Jones Industrial Average and S&P 500 yet again closed at record highs.

"The invisible cover of their defeat is evident every day in this market and it's something we don't talk about enough—how the heck do you think we've managed to go six straight months without a 5% decline? Capitulating short-sellers are like a fifth column supporting the bulls, even if they're not doing it by choice," he added.

The 30-stock Dow is up 16% so far in 2021, while the broad S&P 500 has advanced nearly 19% in the same span. The tech-heavy Nasdaq, which outperformed Thursday and rose 0.3%, is up 15% year to date.

Cramer often discusses the fundamental factors supporting equities, but said Thursday it's important to also emphasize the implications of online traders on sites like Reddit who made their presence known in January by igniting the GameStop and AMC Entertainment frenzy. Then, as now, Cramer said this group of investors looks for stocks with sizable short positions.

"That means the stocks of companies with problems, the kind that are liable to attract short-sellers, they've got a degree of protection they never had before. These days, it's much more dangerous to short anything," Cramer said.

Short-sellers such as hedge funds borrow shares of a stock and then immediately sell them into the market, with the expectation that it will fall in price. If that happens, they purchase the shares back and return them, profiting off the difference.

When the opposite happens, the short-sellers may decided to minimize their losses and buy the stock at its current higher price, adding further upward pressure on the shares.

"I don't know where this ends, but I can tell you that as long as there are lots of people shorting stocks that are popular on internet message boards, as long as there are lots of money managers shorting the entire market, betting that it will be dragged down by the weakness in bonds or the delta [coronavirus variant], the bears will have a very hard time putting this market down," Cramer said.

"Until something happens that truly panics the bulls, creating natural sellers, this is going to be a very tough environment for the shorts," he added.

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