Click to Enlarge Short sellers are back on the job.
The latest short interest report shows an increase of 3.7% on S&P 500 companies — the largest increase since February 2013. The increase in short interest suggests that traders are setting-up for a short-term decline in prices as one of the more volatile months of the year — October — approaches.
The additional short interest makes some sense considering that many factors are suggesting a short-term lull for the market, but as always, a number of companies have short interest that appears to be way too bearish, setting them up for a potential short squeeze.
Short squeezes occur when a heavily shorted stock rallies higher, forcing the traders to cover or close their short positions by buying shares back. The ironic twist: Those short sellers end up creating more buying pressure to move the stock even higher.
Our scans identify stocks that remain in a technically strong pattern while seeing increases in already high short interest, resulting in stocks that have a higher likelihood of seeing a short squeeze rally. The accompanying table identifies the top 10 S&P 500 companies likely to see a short squeeze, and we’ll take a closer look at three: