The newest short interest data for the end of August reveals little change in the overall bets against the market. For the last two-week reporting period, cumulative short interest on S&P 500 stocks dropped by less than 1%, indicating that the short selling crowd remains uncommitted to an extreme view on other side.
The accompanying chart displays cumulative short interest for the S&P 500 Index’s companies during the past two years. Of note is the fact that total short interest has remained stubbornly idle through 2013. The lack of large swings in cumulative short interest suggests that overall sentiment remains balanced, which is a positive for the market.
However, we continue to see large shifts in short interest at the company level, backing up our opinion that the market will favor stock picking over index investing as we move through the second half of the year.
The table below identifies 20 companies in the S&P 500 that saw the largest changes to short interest in the latest report. As always, our research identifies companies that are trading with good technical trends and growing short interest — a signature that often suggests a pending short squeeze rally.
The following three companies have really grabbed our attention out of the 20 because they appear ripe for a jump higher as the shorts feel increasing pain:
Click to Enlarge Buildings materials company Fastenal (FAST) got hammered during the recent weakness caused by rising interest rates. Now, Fastenal stock is staging a technical comeback as it is breaking back above the $50 level.
Short sellers have increased their bets, given that the stock topped out at $50 in early August. For now, we’ll follow the charts, which suggest the next stop is likely to be $52 or higher — a price that would likely cause the shorts to start buying, putting a price of $56 within FAST traders’ sights.
Click to Enlarge Consumer discretionary stocks are heating up as we enter a seasonally bullish period of the year. Adding to the heat is the fact that travelers are taking to the road and air again, despite rising ticket prices.
Tripadvisor (TRIP) has done well over the last three months, returning 15% against the S&P 500’s 3.7%, but the shorts aren’t buying it — yet — as short interest remains near its highs.
We’re expecting another positive report from the company in late October, but the shorts aren’t likely to hang around that long. Expect to see TRIP take a ride back toward $80.
Click to Enlarge Legg Mason (LM), a financial services company, has been working through some restructuring, which is why the shorts have been hammering the stock, taking its short interest ratio to its highest level in more than two years. The 13% increase in short interest takes place as Legg Mason stock is bouncing from its technically significant 50-day moving average, which is trending higher.
Our experience tells us that the bearish short sellers will start covering their positions as the stock breaks back toward $34.50, causing a likely rally towards the $36 level.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.