by Johnson Research Group | April 16, 2013 1:50 pm
The market is finally looks like it’s ready to yield to some profit-taking as we head into earnings season this week. At this point, the market is being led lower by some economically tied sectors such as Precious Metals, Materials and Oil & Gas stocks, since the commodities tied to these stocks have been slipping lower on questionable economic growth data.
Click to EnlargeCuriously, a look at the most recent short interest reveals that the short sellers did a good job of getting ahead of the recent selling pressure. For the latest two-week period, short interest rose considerably on stocks in the Metals & Mining SPDR (NYSE:XME) indicating that the “smart money” is capitalizing on the massive breakdown in gold prices.
Looking at a the historical chart for the XME, the spike in short interest that we’re seeing is similar to the activity that we saw ahead of the top in gold prices last September.
Short interest continued to rise on this group of stocks during the initial declines in gold, suggesting that the short sellers among these stocks are a little smarter than the average investor since short interest is typically a fantastic contrarian gauge.
Outside of the Mining companies, the Utilities SPDR (NYSE:XLU) was the only of the major SPDRs to see an increase in short interest. The majority of the shorting activity appears to have focused on closing short positions as these bears were growing tired of the market melting higher against their positions.
We’ve indicated before that short interest is one of the best contrarian indicators out there as short sellers often fuel short squeeze rallies that pop stocks higher. The latest report shows a decline in short interest though — a situation that may be indicative of a toppy market as the bears (short sellers) are now joining the bulls once they close their positions out.
As we point out often, it’s always best to be cautious when the rest of the market turns bullish, which appears to be the growing case.
Given the shift in short selling that we’ve seen, it’s not a huge surprise that there are only 11 companies within the S&P 500 that meet our usual required parameters of “Short Squeeze Candidates.” A table of these companies and their short interest data is displayed below.
A few stocks on this list of eleven stand out as breakout candidates, even as the market has hit some selling pressure. Let’s take a closer look at three:
Click to EnlargeCampbell Soup Co.‘s (NYSE:CPB) slogan of “Mmm Mmm Good” also sums up the stock’s performance this year. Shares are trading more than 30% higher year-to-date. One reason that investors have bid the shares up is the 2.5% dividend that is attracting the dividend investing crowd.
In addition to a nice dividend, CPB has also maintained its fundamental strength, with EPS results have besting analyst expectations by an average of around 5% for the last year while revenue grows.
After busting through chart resistance at $42, CPB shares are breaking into new multi-year high territory, which should get the shorts running for the doors, pushing the shares towards our target of $50.
Click to EnlargeBest known for their unscripted reality shows, Discovery Communications (NASDAQ:DISCA) has been one of the leaders among media-providing companies. Investors appear tuned-in to the fact that these companies are likely to benefit from changes to the broadcasting world.
The shares are pressing to new all-time highs as they push against the $80 mark, but that hasn’t deterred the short sellers that now have more than eight times the daily volume shorted.
Watch for a break above $80 to get these shorts covering their positions, a squeeze that would likely help DISCA move to $85-$90 quickly.
Click to EnlargeReal estate remains hot as real estate ETFs like the iShares Dow Jones US Real Estate Fund (NYSE:IYR) continue to lead the market higher. Kimco Realty (NYSE:KIM) is a REIT that focuses on development of shopping centers across the U.S. — a market that is accelerating as consumer activity improves.
Short sellers are exposed here with almost nine times that average daily volume shorted against their accounts, meaning that the recent move above the $23 level should get them thinking about buying shares to reduce their losses.
Next stop for KIM could be $30 according to the short squeeze potential and technical strength of the shares.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
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