With the market sprinting lower, we would typically expect to see the short selling crowd jump on the bearish bandwagon to harvest easy money. But, when we did our search for potential short squeeze candidates, we were surprised to find that the shorts are actually reducing their positions on the recent decline.
Click to Enlarge That’s right: According to the most recent data, short interest on the S&P 500′s companies registered a decline of 2%, along with declines in Dow Jones Industrial Average components.
Sure, we expect some decline in short interest when the market heads lower just because many shorts tend to lock in profits. But most market bottoms are typically marked by an increase in short positions as it peaks. This, of course, serves only to underscore the hardest rule on Wall Street to follow: The best time to buy is when everyone else is selling (or short selling, as it would apply here).
At the stock level, there are some interesting bullish setups as a result of potential short squeezes that may be waiting to provide a catalyst for higher prices. As always, our database filters the S&P 500 for companies that are seeing relatively high short interest despite a strong technical backdrop. We look for this combination because it’s often the signature of a pending short squeeze.
The accompanying table displays the top companies in this position among S&P 500 Index components, but for a closer look at three appealing short squeeze candidates, read on:
Short Squeeze Candidate #1: Allstate (ALL)
Click to Enlarge Insurance giant Allstate (ALL) saw a whopping 173% increase in short interest over the last two-week reporting period.
The increase in bearish bets comes despite the fact that ALL stock is trading well above its 50-day moving average. (Keep in mind that only about 30% of the companies in the S&P 500 are trading above their respective 50-day.)
Watch for support at the $54.50 to serve as an entry price for a long position likely to pay when the short squeeze hits.
Short Squeeze Candidate #2: PetSmart (PETM)
Click to Enlarge PetSmart (PETM) has been undergoing a technical turnaround as shares have started an intermediate transition from a bearish to bullish trend.
PETM stock is flashing signs of support at the 50-day moving average, now trending higher at the 66.90 mark. The rising 50-day should start pressuring a short squeeze, helping PETM stock drive toward a four- to six-month target of $70.
Short Squeeze Candidate #3: Teco Energy (TE)
Click to Enlarge Finally, Teco Energy (TE) — the southeastern utility company — has been transitioning into long-term bullish mode as the 50-, 100- and 200-day trendlines have reversed to move higher.
The underlying technicals should provide support for TE shares concentrated between the $16.75 and $17 range. This technical support should start pressuring the short sellers that have recently increased their positions.
Watch for a short squeeze to propel TE stock toward the $20 mark over the next few months.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.