Short sellers are remaining relatively quiet of late, which should be a warning for the bulls.
For the last two-week reporting period, cumulative short interest on S&P 500 companies rose by 3.6%. Looking back at the past year, that does register as one of the larger two-week increases in bets against the market, and it appears that the bears are starting to nibble on some short positions.
From an aggregate perspective, though, the lack of pessimistic behavior indicated by the relatively low levels of short interest supports a weaker short-term outlook for the market (as we know, the best time to buy is when everyone else is selling or shorting).
Still, there are some bullish opportunities at the stock level as a few companies are seeing large short positions increase the odds of a short-covering rally.
As always, we like to display the top companies that have a higher likelihood of seeing a short covering rally. All of these companies have relatively high short interest ratios while posting some technically strong performance.
Here’s a closer look at each:
Click to Enlarge One of the stocks that grabbed our attention out of the gate is Fastenal (NASDAQ:FAST). This Minnesota company manufactures fasteners and other industrial and construction supplies under their name. The products include bolts, nuts, screws, studs, washers and other fasteners.
Fastenal operates in the manufacturing and housing markets, which is one fundamental reason to like the stock. FAST has climbed 11% since the beginning of the year, outpacing housing stocks and the market overall.
Despite the positive performance (both fundamentally and technically), FAST still maintains a high short interest ratio of 11.1 (we typically consider a SIR above 5 to be high). Shares appear to be consolidating just above $51, which might be the right opportunity to go long FAST; a break above $52.50 would likely initiate a covering rally and subsequent move above $55.
Click to Enlarge The real estate market has been heating up all over the place, including the real estate investment trust market. The strength in REITs has provided nice returns for investors, as companies like Kimco Realty (NYSE:KIM) have outperformed the S&P 500.
Year-to-date, KIM shares are up almost 13% as investors continue to buy the dips on an improving outlook for the real estate market. The shorts don’t appear to agree, though, as short interest on KIM has been in a nice uptrend, suggesting that the beloved “wall of worry” is in play.
The current short interest ratio of just over 7 suggests there must be a crowd of short sellers that are feeling the pinch from the technically solid trend of KIM shares. A move above $22 likely will get these shorts running for the exit, sparking a rally that will help push the stock to the $25 level in the intermediate-term.
Click to Enlarge Lastly, we have a company that appears to be in the midst of a covering rally.
Shares of Sysco (NYSE:SYY) have been lagging the market as of late, as they have tracked sideways for all of 2013. That said, we’re now seeing short interest on this food service company decline from a recent peak.
In the previous short interest report, the SIR for SYY was 12 — a number that has now declined to about 8.5. The drop in the short interest ratio signals that the shorts are starting to close positions as the stock appears ready to start leading higher again.
Look for a move above the $33 level to serve as the starter pistol for the shorts to start covering the rest of their positions in SYY, helping shares move above $35.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.