The bears are starting to get a little fidgety.
According to the latest short data (for the period ended Dec. 31), short interest on S&P 500 companies dropped by almost 7%, suggesting that the shorts are starting to close out positions as the market leans higher.
Looking at the major sector totals, healthcare stocks saw one of the largest declines for a group, as short interest dropped 10%. Within the sector, pharmaceuticals dropped 11.3% and healthcare equipment fell 7.3%. (Anyone surprised that the Health Care Select Sector SPDR (NYSE:XLV) broke through to new highs in January?) However, with the shorts evacuating positions in healthcare and the XLV hitting new highs, it might be time for a bit of a break. Those holding the XLV or healthcare-related companies might consider initiating some profit-protecting stop-limit prices on their positions.
Looking at the other side, there wasn’t a single broad index category that saw an increase in shorts, backing up the view that, at minimum, the shorts sellers took the holiday season off and didn’t even bother to initiate new bets against the market. The report that will detail the first half of January’s short interest activity will give us a better view of that.
But that doesn’t mean that there aren’t any opportunities at the individual stock level.
The table below identifies all S&P 500 companies that saw an increase in their respective short interest of 10% or more. This list was additionally filtered for companies that are trading above their respective 50-day moving averages, since short interest additions to technically weak stocks are expected.
Stanley Black & Decker
Click to Enlarge Topping the list — and grabbing our attention — is Stanley Black & Decker (NYSE:SWK).
This company is most recognized with the lines of tools it produces. SWK’s earnings have been flat to negative over the last year — likely one reason that the shorts are betting against it, as its next earnings announcement is just more than a week away (Jan. 24).
Current earnings expectations for Stanley Black & Decker are for $1.42 per share, which is slightly lower than the expectations for the previous quarter. We view the increases in consumer spending and the improvements in the housing market as a sign that the Do-it-Yourselfers may be spending more on SWK’s products — a potential positive for Stanley’s upcoming earnings. In addition to the shorts, the options market has been betting against SWK; the stock’s put/call ratio is above 1.0 and rising (a ratio above 1.0 indicates more puts than calls, a sign of pessimistic sentiment).
Watch for any positive news in the Jan. 24 earnings report to get the shorts running to cover their extremely large positions, initiating a short squeeze rally.
Click to Enlarge Another company on the list that grabs our attention is Aetna (NYSE:AET).
We’ve loved the P&C insurers through the second half of 2012 and have to say that AET slipped through the cracks for us, but this relative strength performer looks ready to roll in 2013. For the past six months, AET shares have returned 20% against the S&P 500’s 8.5%.
Despite that, the shorts are increasing their exposure to the stock, extending the number of days to cover their positions to more than seven, as evidenced by the accompanying parabolic short interest ratio chart.
We don’t expect the AET bears to stick around too long, as the company will announce earnings on the last day of January, and the past two quarters have been positive. With support from a nicely trending 50-day moving average and relative strength from the insurance group, it appears to be only a matter of time before AET shares get squeezed higher.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.