Dow surges as stocks recover from GameStop mania

Hedge funds on Wall Street are catching a break from the short squeeze that ensued after retail investors rapidly pushed up the share price of GameStop, AMC and other heavily shorted stocks last week.

Investors who had shorted those stocks — betting the prices would fall — lost billions of dollars when the share prices skyrocketed last week, driven up by an army of amateur traders on Reddit. Hedge fund Melvin Capital needed a $2.75 billion bailout to make ends meet.

The fallout of the Reddit frenzy weighed on overall market sentiment last week, as Wall Street sold stocks to make up for their short-bet losses. But with the prices of day traders' favorite shares now falling, more bullish sentiment has returned: the major stocks indexes rallied, following international benchmarks higher.

The Dow climbed nearly 2%, or almost 600 points, in the late morning Tuesday. The broader S&P 500, which recorded its best day since November on Monday, climbed 1.7%. The Nasdaq Composite was up 1.4%.

The small-cap Russel 2000 index, which GameStop is part of, was up 0.4% Tuesday. GameStop's stock is still up more than 500% this year, having surged more than 1,600% in January.

With the GameStop story on the backburner, investors are back to focusing on earnings season. After the closing bell, Amazon and Google are due to report. Both companies are constituents of the S&P and the Nasdaq indexes.

Even silver prices, which retail investors moved onto late last week and Monday, reversed course Tuesday. Silver futures fell more than 8% to just below $27 per ounce mid-morning.