Short sellers appear to be taking the recent rally in stocks somewhat seriously, as total short interest on the S&P 500 companies dropped by a little more than 1% during the most recent two-week reporting period.
Click to Enlarge The slight decrease in short interest seems even smaller when you consider the fact that S&P 500 short interest is near its 2015 peak, and almost 16% higher than where it began for the year.
The amount of short interest suggests that pessimism toward the market remains high.
It also suggests that the potential for short squeezes is equally high.
The accompanying table displays the top 15 companies to populate our list of potential short squeezes for late October.
Here are three companies that look like particularly strong candidates for short squeezes.
Potential Short Squeezes: Visa Inc (V)
Visa (V) shares gave investors a golden opportunity to buy on a pullback in October as the stock made a solid bullish bounce from support at its 200-day moving average. Since then, V shares are trading more than 11% higher, but it’s not too late to grab this bull by the horns.
Visa announced quarterly earnings today, and although shares are off after a slight miss, Visa’s deal to buy Visa Europe could end up being a trigger for another short covering rally as Wall Street digests the news.
Plus, Visa stock is moving to new highs itself, adding even more pressure to the bears.
Potential Short Squeezes: Valley National Bancorp (VLY)
Valley National Bancorp (VLY) is a commercial bank that might have just found itself in a sweet spot. On Wednesday, VLY announced earnings that were in line with analyst expectations at the same time as the market came to the realization that a December interest rate hike is now in the mix.
The latter is important because slightly higher rates will enhance the balance sheets of commercial banks.
The combination of positive fundamentals has VLY shares breaking through the top of their trading range, which is now activating a short squeeze rally.
You see, there are currently more than 20 million shares sold short against VLY, or 11 times the average daily volume. What that means is that a lot of bears are going to be covering their bets, driving prices higher.
We’re expecting the stock to target a move to $12 over the short term with a longer-term target of $13 — more than 20% higher — as the technical buyers flood in and the shorts flood out.
Potential Short Squeezes: Dean Foods Co (DF)
Dean Foods (DF) has been in the midst of a long-term technical turnaround that has finally built some reliable technical support under current prices and minimized the overhead resistance above. During this turnaround, the bears have piled on the short positions to the tune of 13.4 million shares shorted, or a short interest ratio of 6.9.
Now, it’s just a matter of time before shares nudge higher to spark a short squeeze rally.
According to our charts, $18.50 should be marked as the starting line for a covering rally, as this would break above the recent consolidation. The initial move to $20 is likely to be fast and direct, followed by another round of technical buying that will push the stock toward the $21 level.
All in all, the covering rally should move the stock between 15% and 18% over the intermediate term.
As of this writing, Chris Johnson was long V and may take a long position in VLY within the next 36 business hours.
