The latest short interest was released earlier this week, giving us a look as to how the short sellers have changed their approach to trading the short-term bullish breakaway market. Since the end of July, short interest in the S&P 500 companies has increased only 1.5%, despite a rally of almost 6%. That means that the short sellers have yet to scramble to cover their positions, but are instead adding to their bets that the market has hit a top.
Now, we believe that the market is due for some short-term weakness as the September seasonality should have some negative effect on stocks, but the message that the increase in short interest positions sends is that the “Wall of Worry” is firmly in place, which should help stocks reach higher.
The table below shows the top ten S&P 500 companies as ranked by the percent increase in short interest that each saw over the last reporting period. The number of banks that saw a large percent increase in short interest is of notable interest on this list.
The financials spent the month of August in serious rally mode as the eurozone crisis appears to have been downgraded in severity after the actions of the ECB. We loved the regional banks before the firming of eurozone fears, but now you have to love them even more, unless you’re a short seller. Expect to watch these stocks continue higher and at some point squeeze the short sellers back into the market as buyers.
Here are a few of the individual names of interest from this list:
Fifth Third Bancorp
Regionals have been a favorite of ours due to the fact that their balance sheets are simpler than the super banks like Citigroup (NYSE:C), Morgan Stanley (NYSE:MS) and Bank of America (NYSE:BAC). Cincinnati-based Fifth Third Bancorp (NASDAQ:FITB) has rallied 24% this year, compared to the S&P 500 returns of 16%. The company bested earnings estimates last quarter after missing the previous two quarters.
Short interest spiked on FITB shares, providing an opportunity for us to get into these shares before a covering rally ensues. Earnings are scheduled for Oct. 12, providing a potential catalyst for the short sellers to start covering their positions soon. We like the stock to track to the $17.50 level after breaking through chart resistance at $16.
Click to EnlargeHome Depot (NYSE:HD) has skyrocketed as the homebuilding sector is finding its groove again. Last week’s announcement that the Fed will be purchasing mortgage-backed securities is just another move that will help the housing and related stocks continue their climb.
Home Depot shares are now headed towards the $60 level, a price not seen since 2000. In addition to the relatively high short interest ratio, the fact that only 63% of the analysts covering HD shares have it ranked a “buy” or better signals that The Street has yet to warm up to this relative strength leader. We expect the short covering rally and potential analyst upgrades to fuel HD shares into new high territory through the last quarter of the year. We’re targeting the $75 level as a year-end price for HD shares.
Principal Financial Group
Shares of Principal Financial Group (NYSE:PFG) are pressing against the $29 to $30 level and have been the site of some consistent chart resistance since October of 2011. The shares have been on a tear of late, almost doubling the S&P 500 performance for the last quarter. Technical momentum now looks to favor a break above the $30 level, which will send the short sellers into the market quickly to cover their losing positions.
From a technical perspective, $35 is likely to be the next stop for PFG shares, with the first $2 or $3 of gain likely to happen quickly at the cost of the short sellers as they squeeze the stock higher.
As of this writing, Chris Johnson did not hold a position in any of the aforementioned securities.