Short sellers appear to be shying away from making a call on the market, as short interest activity is little changed in the second half of January. For the last two-week reporting period, short interest on S&P 500 stocks declined by a little more than 1%, while the Dow Jones Industrial Average and Nasdaq-100 stocks saw slight increases of 0.2% — all signaling that the shorts appear unwilling to step in front of the running bull market.
Considering the fact that the market often climbs a “wall of worry,” the lack of short interest activity should concern those of us that approach the market with a contrarian viewpoint.
The inactivity and other sentiment indicators continue to suggest that the market is likely to see some selling pressure in the near-term as “the crowd” has turned relatively complacent. The quickly approaching sequestration on March 1 might act as the trigger for the pending correction.
Still, at least a few sectors are seeing increases in short interest, suggesting an increase in pessimism that we often associate with potentially bullish short squeeze trades.
At the top of this potential squeeze list are the SPDR Health Care Select Sector Fund ETF (NYSE:XLV) component stocks, which saw an increase in short interest of 7.8%. This has been one of the stronger sectors, returning 8.4% year-to-date compared to roughly 6% for the market, so the increase in short interest runs counter to what you might expect.
For ETF investors out there, XLV possesses that powerful combination of bearish sentiment, positive fundamentals and strong technical trends. This combination suggests that the XLV should continue to outperform the market as we progress through 2013, making it a great longer-term hold for portfolios.
Scanning the broader S&P 500 for potential short squeeze candidates still produces a healthy handful of stocks. The table below displays the top S&P 500 short squeeze candidates for mid-February:
Here’s a look at some of the best candidates, a couple of which actually aren’t as extremely shorted:
Click to Enlarge Toy manufacturer Hasbro (NASDAQ:HAS) isn’t playing around in 2013; shares have climbed almost 11% since the beginning of the year. The company has beat analyst earnings targets for the last three quarters, the most recent being last week.
Short sellers were building positions ahead of the earnings announcement — a strategy that didn’t pay out. HAS shares are now in position to take out the $40 level, which would clear the way for a move to $47.50, forcing a short squeeze situation quickly.
Hartford Financial Services Group
Click to Enlarge Hartford Financial Services Group (NYSE:HIG) isn’t even on the list, but we couldn’t help pointing it out. Insurance companies have been lighting things up as the KBW Insurance ETF (NYSE:KIE) and its components are outpacing the market in 2013.
Hartford announced earnings results that were 80% better than analyst expectations. Despite that, the stock has seen some selling on the news, setting the stage for a potential move higher. The current short interest ratio for HIG is above 8.0, indicating a high chance that short sellers will pop prices higher as the shares gain technical support at the $24 level. Look for a short-term price target north of $27.
Click to Enlarge Diversified food company H.J. Heinz (NYSE:HNZ) is best known for its condiments, though football fans also know the company as the namesake of one of the most-feared gridirons in the NFL, the Pittsburgh Steelers’ Heinz Field.
Heinz, which also isn’t on our list of the most “extreme” readings, has strung together four quarters of earnings beats and is set to announce its next set of results before the end of February, meaning a potential trigger for a short squeeze is approaching. Analysts have been downgrading the stock during the past six months on “valuation,” signaling additional pessimism towards HNZ. Expect any positive news in the upcoming earnings report to get the shorts running and the stock popping higher.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.