Click to Enlarge The mid-month short interest report is fresh from the presses, revealing a crowd of traders that appear to be picking and choosing their shorting opportunities instead of adding short interest across the board.
The activity supports what we already know; the market has entered into a “picker’s market” as correlations among the major indices are starting to show signs of decline.
We noted this behavior by the changes in the short interest data on S&P 500 companies. For the last two weeks, aggregate short interest on these 500 companies declined a whopping one-tenth of a percent (0.1%), but the average change in short interest of the companies was an increase of 2.5%. This tells us that there were some large changes at the company-by-company level, changes that are likely to identify some opportunities for trades.
The table below displays the S&P 500 companies that saw the largest change in short interest for the last reported two week period. As always, we filtered our database to only include companies that are trading above their respective 50-day moving averages, something that narrowed the group considerably this time around as fewer than half of the S&P 500 stocks can say that they are above their respective 50-day trendlines right now.
Based on our research, here are three big-name stocks with high short interest but a good chance of a move higher on a short squeeze.
Click to Enlarge With a short interest ratio of 6, Chesapeake Energy (CHK) is among our favorites on this list. The market is focusing on this energy leader after the dust settled from the Aubrey McClendon drama and it shows as the share prices have added almost 60% year-to-date.
Short sellers are increasing positions at a rapid pace, setting the stock up for a covering rally. With CHK challenging its March 2012 highs at $26, a break much higher will likely act as the trigger for the shorts to begin their buybacks.
Click to Enlarge While not posting an extremely high short interest ratio, the 22% surge in short positions on CSX Corp. (CSX) makes it an attractive buy. Activity on the railroad companies has been on the increase as signs of economic improvement begin to take hold.
This is important to the rail stocks as the amount of items shipped via rail always increases as the economy improves. CSX shares are trading above their 50-day, which is also trending higher, making it a technically attractive stock. The shares recently ran into resistance at the $26 level, which goes back to chart resistance from the June 2011 top. A break above this level ($26) will turn this stock into a, forgive us, runaway train headed to new all-time highs.
Click to Enlarge Finally, Tyson Foods (TSN), a name almost everyone is likely familiar with. Shares of TSN saw an 8% increase in short interest as the stock was getting toppy at $32.
TSN shares have pulled back more than 10% from those highs, but are now resting on technical support from their 50-day moving average. Our experience is that the shorts will likely close out their winning positions as the stock finds support.
This is a great time to point out that short squeezes don’t always happen when a stock is working against the short selling crowd, they do make money sometimes and when they do they still have to close their short positions by buying the stock back, which is what we’re looking for here.
Eye a move back to the $32 level helped by the shorts taking profits at technical support.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.