After a brief rest, short sellers appear to be returning to the market. Overall, short interest on S&P 500 companies increased by 2.3% for the latest two week reporting period — the highest increase since mid-March.
As much as we thought prices would slump through the summer, it appears that — for now at least — buyers remain in control of stocks. Investors are scrambling for a safe harbor from slumping fixed income investments, with the massive cash flow from the bond market helping to bolster stock prices. This new wave of cash flow is pressuring short sellers in a classic short squeeze.
Our typical scan for companies trading in technically strong trends with rising short interest yielded a number of qualified candidates. Some names like Tripadvisor (TRIP) have been on our list for a few months, and continue to beat the S&P 500 for performance. The table below holds some new names as well, though.
Let’s take a closer look at a few of them.
Click to EnlargeAfter months of lagging the market, material stocks like U.S. Steel (X) are getting a bid thanks to signs of a semi-prosperous economy, which could signal increase in demand for raw materials like steel.
Last week’s robust auto sales figures, combined with rumors that U.S. Steel and other companies are in the process of filing a complaint that may halt the dumping of cheap foreign steel into the U.S. market, helped to break X’s technical funk.
With short interest at its highest level in more than two years, the technical awakening is likely to squeeze the shorts out of their positions, propelling X higher.
Look for a move to $21 before summer’s end.
Click to EnlargeHistory tells us that consumer discretionary stocks flourish and outperform in the early stages of an economic recovery as consumer confidence builds. Short sellers hit Petsmart (PETM) shares hard last month, increasing their positions by 14% … and why not? PETM shares have lagged the market over the short-term and appear stuck in a pattern of lower highs and lower lows.
The stock warrants our attention since nothing can get the shorts running faster than a shift in technical patterns, like a break of the lower highs pattern. PETM share just broke above their rising 50-day trendline, suggesting a potential improvement in the trend, suggesting that a break above $70 will trigger the short squeeze.
We like the stock’s chances of regaining a leadership role as it heads to $72.
Click to EnlargeThe last short squeeze candidate isn’t on the list above due to the fact that it is not part of the S&P 500. That aside, CNO Financial (CNO) has been whipping the market on performance, returning more than 18% over the last three months.
Despite the performance, the shorts are increasing their bets, meaning that it is likely only a matter of time before they rush to cover their losing positions by buying the stock back.
Target a rush to $16 over the short-term.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.