3 Stocks Building Toward a Big Short Squeeze

by Johnson Research Group | December 5, 2013 3:13 pm

Short sellers are starting to get aggressive as we enter the final month of the year. For the last two-week reporting period, short interest on S&P 500 companies rose by 2.8% — its highest levels in more than a year. We view that as a perfect opportunity to pick up a few short squeeze candidates.

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The addition of shorts shouldn’t be a surprise. Analysts, pundits … everyone has been increasingly nervous of a potential snap to the market’s breakneck rise.

While it shouldn’t be a surprise to see some weakness during the short-term, the increase in short interest suggests that any market decline — such as the current one — is likely to be a short and fast corrective move. After all, traders are already factoring a decline into stocks, via the short sales activity.

This means traders and investors looking for an opportunity to grab up some bargains on a decline need to prepare their short squeeze buying lists right now. That’s because any correction likely will be met with buying soon thereafter, as sidelined traders try to squeeze a lot of cash into a short-lived window of opportunity.

The above table shows a number of short squeeze opportunities that are likely to lead the market higher. Here’s a closer look at three:

Short Squeeze Candidate #1: Cerner (CERN)

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Healthcare has been in the air lately with the implementation of the Affordable Care Act. The uncertainty surrounding the changes in legislation has traders betting against a number of companies, including Cerner (CERN[1]).

Despite trading near all-time highs, short sellers have been hammering this healthcare information systems company. Current short interest for CERN stock stands at 22 times its average daily volume, setting up a nice short squeeze possibility.

Expect to see the shorts’ resolve start to break as CERN stock cracks the $60 level, sparking a short squeeze.

Short Squeeze Candidate #2: Perrigo (PRGO)

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Another classic setup for a short squeeze is the activity that we’re seeing in Perrigo (PRGO[2]).

PRGO stock is trading more than 50% higher for the year, which has the shorts screaming for a top. Perrigo has spent some time consolidating at the $155 level, which caused the shorts to take notice and add even more bearish bets. The 17% increase in short interest is a great indication that a short squeeze is pending, which will help PRGO stock break out of its recent consolidation.

In addition, Perrigo has some potential support building below as the 20-day moving average is sneaking up to the $155 level. The potential for support from the technicals and a break above $160 will likely be enough to get the shorts to scramble and turn into buyers to cover their positions, helping a new rally in PRGO stock.

Short Squeeze Candidate #3: Teradyne (TER)

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Technology shares have been seeing some shorts lately as traders are betting on a fade in the trend of technology leadership. Among the names on our short list for squeezes is Teradyne (TER[3]).

This semiconductor equipment provider is benefiting from stronger demand for chips in a myriad of electronic devices — the same fundamentals that have Intel (INTC[4]) on our short list of technology names to buy.

TER stock recently consolidated at the $17 as three technical trendlines — the 20-, 50- and 200-day moving averages — are all settling in around $17. Teradyne is likely to benefit from the confluence of support from the technicals and use $17 as a launching pad for another rally. That would trigger a short squeeze and add to the buying power for TER.

As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.

Endnotes:
  1. CERN: http://studio-5.financialcontent.com/investplace/quote?Symbol=CERN
  2. PRGO: http://studio-5.financialcontent.com/investplace/quote?Symbol=PRGO
  3. TER: http://studio-5.financialcontent.com/investplace/quote?Symbol=TER
  4. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC

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