by Johnson Research Group | November 21, 2012 8:43 am
Fiscal cliff jitters and other issues have pulled stocks back more than 8% from their September highs. The post-election selloff plunged the S&P 500 and other major indices into a short-term technically oversold situation last week, signaling a higher likelihood that the market would see a surge higher in the coming weeks.
Given the positive seasonality of November and December, the oversold bounce should be able to get some traction and turn into a broader rally going into the end of the year. This situation has a number of stocks flashing bullish signals on our short squeeze radar.
The table below displays 14 companies — three of which we will highlight — that look like quality short squeeze candidates for a bullish run over the next four to six weeks. Short squeezes drive prices higher when speculators that have shorted a stock are forced to close their losing positions. The higher the short interest ratio, the better the odds of a short covering rally.
Let’s take a look at three that stand out:
Click to Enlarge Lennar (NYSE:LEN) is in the residential construction business — a sector of the market that is growing more popular as green shoots of a housing recovery are taking root and growing. Lennar has been blowing analyst earnings expectations out of the water for the past three quarters; the latest beat was by a margin of more than 40%.
From a technical perspective, Lennar stock has been traveling higher on a rail, represented by its 50-day trendline. LEN shares have bested the S&P 500, returning more than 80% year-to-date. The past week has seen a dip below the 50-day MA (remember that the S&P 500 dipped below its 200-day MA) and is already recovering from this short-term selling.
The short interest ratio of better than 7.0 suggests that Lennar will jump higher soon as the shorts give up. We expect a quick move to $45 after breaking $40.
Click to Enlarge Everyone recognizes Moody’s (NYSE:MCO) as the rating agency that dissects credit and economic data to rate debt obligations and the entities that offer them. Given the tepid economic situation, the company has been busy, as evidenced by the recent trend of revenue and earnings reports, which have been positive.
Investors remain cool to MCO as the short interest, analyst recommendation and options activity all continue to show that traders are betting against the bullish trend. This is a great example of the “Wall of Worry” that we’re always searching for to represent bullish opportunities.
Like Lennar, Moody’s has remained above its 50-day moving average during the recent pullback in the market, which is a monumental achievement given that only about 20% of the S&P 500’s companies remain technically sound by this measure.
We think the failure of MCO to fail (by breaking below its 50-day) will get the shorts moving out of their positions, driving the stock back to — and likely above — its 52-week highs just below $50. From there, another 10% run to $55 is likely.
Click to Enlarge Finally, let’s finish-up with another housing-related stock, Pier 1 Imports (NYSE:PIR). The design and decorating retailer has been on a run as the housing market and discretionary spending see improvements. PIR shares rallied nearly 14% during the past six months, compared to the market’s return of 3.3%. The stock has seen a decline of late, though, as traders locked in profits when PIR closed in on resistance at $21.
PIR didn’t quite hit its 200-day MA on the pullback and is trying to snap above the technically sound 50-day — a move that will get the professionals and technical traders bidding the stock higher again. Meanwhile, the shorts will get caught in a buying frenzy to close their positions, adding fuel to the fire.
The short interest ratio of almost 9 will help to drive PIR back to its all-time highs above $25.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
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