Stocks are teetering on the brink of a typical seasonal selloff as the beginning of May and the end of earnings season are combining to make investors unsure about the short term.
From a macro view, we don’t disagree. Many of our short-term indicators are flashing signs that the market is set for a 5% to 10% decline over the next month or two.
However, short interest is distinctly different from many other data-based indicators since it works in both rising and falling markets.
In rising markets, high short interest signals a high likelihood of short squeezes — when short sellers have to buy shares to cover losing positions, adding to buying pressure.
In falling markets, stocks with high short interest have a tendency to be “presold,” meaning they often experience less selling because there’s already a large crowd of investors that have sold the shares short. This attribute often helps highly shorted stocks maintain strength during a market decline, and it helps them recover faster as short squeezes develop on subsequent rallies.
Long story short? Short squeezes develop well in both bull and bear markets. The table above shows a few stocks that we see as having short squeeze potential. Read on as we look at trading targets on the very best opportunities.
Short Squeeze Candidates: General Mills, Inc. (GIS)
Revenue and earnings trends are showing signs of improvement at consumer staples giant General Mills, Inc. (NYSE:GIS), leading to improvements in the shares’ technical outlook.
After a relatively positive earnings report in March, GIS shares moved back above their 50-day trendline, which is now trending higher (a sign of intermediate-term strength).
The short sellers are now betting heavily against a continuation in the trend as short interest has skyrocketed to its highest level in more than two years. The stock is consolidating below $57 right now, but a break above that price should prompt a short squeeze, helping to rally to a target of $60.
Short Squeeze Candidates: Kinder Morgan Inc (KMI)
The energy sector has seen some buying following the fourth-quarter selloff, but in general, energy stocks are nowhere near reaching their highs again.
However, Kinder Morgan Inc (NYSE:KMI) is a standout in this group as the company is less than 5% from its highs and trading in a technically strong pattern.
The short sellers have been aggressively increasing their bets against KMI stock as short positions increased 6% over the last two weeks. The recent short interest ratio for Kinder Morgan nears readings seen in October 2014, just before the stock went for a 13%-plus ride higher as the shorts were forced to cover their losing bets.
We see a similar situation unfolding here, with a short squeeze likely to power a short-term target of $47.50.
Short Squeeze Candidates: Nvidia Corporation (NVDA)
Technology stocks have presented a split market as valuations of social media companies have investors worrying about overvaluations and crashes. Somehow, old-school tech like Microsoft Corporation (NASDAQ:MSFT), Cisco Systems, Inc. (NASDAQ:CSCO) and Nvidia Corporation (NASDAQ:NVDA) have found a way to avoid falling into bear market trends.
In Nvidia’s case, the stock recently announced earnings in line with expectations but has been hit with a round of downgrades that now sees only 37% of analysts giving NVDA a bullish look. Short sellers have done their own downgrading of the shares by increasing the short positions to 10 times the average daily volume (in other words, NVDA has a short interest ratio of 10).
Nvidia trades at 18 times earnings, marking it as a fair value against much of the market. For comparison’s sake, non-tech Procter & Gamble Co (NYSE:PG) trades at a P/E of 20.6! In addition, NVDA shares are trading just above their supportive 200-day moving average, which is currently at $20.26.
We expect to see a short squeeze push prices to $23 — roughly 10% higher — if the stock can rally from its current technical support.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
