By CCN.com: Dow Jones futures ripped higher in early trading Wednesday as short-sellers were forced to close out their positions. The epic short squeeze whipped up more momentum for the full-throttle rally that pushed the Dow to its second-best day of the year on Tuesday.

The 500 point relief rally was triggered by Federal Reserve chairman Jerome Powell who turned dovish on Tuesday. But the tear higher was amplified by a short-squeeze which slaughtered hedge funds betting against the market.

While the Dow chalked up two percent gains, short-sellers were hit hard. As Bloomberg reported:

“Bearish traders had their worst back-to-back losses in five months.”

Dow futures jump to another triple-digit gain

At 5.58 am ET, Dow Jones Industrial Average (DJIA) futures were 158 points higher (0.62 percent) at 25,504. The Dow is poised to extend Tuesday’s mammoth 500 point gain at Wednesday’s opening bell.

S&P 500 futures followed the Dow 17 points higher (0.61 percent) while the tech-heavy Nasdaq futures chalked up the largest percentage gain, up 57 points (0.79 percent).

An epic short-squeeze leaves hedge funds reeling

Hedge funds have been loading up on short positions in recent months to hedge the trade war fallout, according to Credit Suisse. But the strategy backfired yesterday as a dramatic melt-up pushed the Dow more than 2 percent higher.

Dive deeper into yesterday’s rally and the short-squeeze is obvious. The most shorted stocks were by far the best performers.

“A basket of companies with the highest short interest was trading at the lowest level versus the S&P 500 in a year” – Bloomberg.

Hedge funds with heavy short positions were forced to buy back shares in volume to protect their downside. The move triggered a monster melt-up.

Tesla jumps 8%

Although not part of the Dow Jones Industrial Average, Tesla’s 8 percent surge yesterday proves our point. Tesla is among the most shorted stocks on the market. Yesterday it roared 8 percent higher as bears were forced to close out their short positions.

Wall Street’s “most hated stocks” outperformed the market across the board in Tuesday’s rally. As Dow and Nasdaq futures rise on Wednesday, it looks like the short squeeze isn’t over yet.

Dow warning signs flashing?

The Fed’s pivot towards a looser monetary policy triggered huge buyer demand. But are traders ignoring the bigger warning signs?

The World Bank lowered its 2019 growth forecasts this morning, in the worst outlook since 2009. The global lender blamed its stormy prediction on trade war volatility and monstrous debt numbers.

Meanwhile, central banks are rushing to slash interest rates. Australia lowered its base rate yesterday with India and China expected to follow shortly. Meanwhile, Wall Street has flashed numerous recession warnings.

Traders are feeling flush as the Federal Reserve swung from hawkish to dovish in a matter of weeks. But is this simply a band-aid for a much bigger economic meltdown?