The market’s recent volatility has the short sellers simply jumping into the fray. The last reporting period reflects a 2.8% increase in short interest on S&P 500 companies — that’s the largest increase in four months, when the S&P 500 was struggling to mark a trading bottom.
Click to Enlarge While a 2.8% increase is an indication that the market is starting to trade with more fear — historically one of the signs of a bottom in stocks — we’ve still not seen enough fear to call a bottom in the market.
The September period we’ve referenced above ultimately saw in an 18.7% increase in short interest over eight weeks that finally hit a crescendo on Sept. 30, marking the all-clear for investors to start broadly buying stocks.
Until we see a similar spike in short interest, though, we’ll have to rely on our models to identify pockets of strength at the individual stock level.
The accompanying table includes a list of short-squeeze possibilities, but three stocks in specific are bucking the overall market’s technical trend and have already seen a spike in the shorts, putting them at the top of our trading lists.
Here are the three stocks that really have our attention as short squeeze opportunities.
Short Squeeze Stocks: Mattel, Inc. (MAT)
The big news for Mattel (MAT) this week was the release of the new Barbie dolls with different body styles, but that’s not what we’re watching to make our bullish call.
Mattel stock heads into an earnings report with a good holiday season behind it and some upgrades starting to roll in. Right now, only 44% of the analysts following the stock have it ranked a buy, but Goldman Sachs just added the shares to its “conviction buy” list while other firms are starting to raise price targets.
The real X-factor for Mattel stock over the next month is the current short interest, which adds up to a short interest ratio of 9.9. Mattel stock is trading more strongly than the market, actually trading in positive territory for the year, which means these shorts are going to scramble for cover soon.
Watch for buying pressure from the pending short covering rally to drive prices toward $30.
Short Squeeze Stocks: Domino’s Pizza, Inc. (DPZ)
Casual dining and other restaurant stocks continue to provide leadership as consumers are happy spending a few bucks eating out over preparing meals at home. Domino’s Pizza (DPZ) stock was on an absolute tear since 2010 as its CEO and management team made huge strides on the brand and company fundamentals.
Namely, they stopped serving terrible pizza.
After hitting some turbulence in mid-2015, Domino’s stock appears to be getting ready for another run.
The technical picture for DPZ just got very positive as shares completed a bullish golden cross pattern while breaking toward new intermediate-term highs. This signals that the consolidation that has gripped Domino’s stock may be coming to an end with a new breakout.
This breakout will be bad news for the short sellers, who have already been cutting back on their bearish bets against the stock. With a short interest of 6.3 and analyst buy recommendations of 36%, there is plenty of room for DPZ to start moving higher as the shorts cover and the analysts start upgrading again.
We’re eyeing a short squeeze from $112 to $120 over the next few months as the negative sentiment fuels a short-term bullish run.
Short Squeeze Stocks: Dean Foods Co (DF)
We highlighted Dean Foods (DF) stock in October 2015 as one of our short squeeze candidates. The stock is now 20% higher, and shares are still set up to continue their march higher.
The short interest ratio for Dean Foods stock peaked at more than 17 during the last quarter, fueling the 20% rally, but short sellers appear to still be adding to their bearish positions as the stock is breaking towards its 2013 highs.
Wall Street analyst data shows only 17% buy recommendations on Dean Foods stock, a data point that helps boost our Behavioral Valuation score to a solid buy recommendation on the stock.
Dean Foods stock currently draws technical support from a number of strong price trends, resulting in a price forecast of $23 during the first quarter as positive techncials combine with a strong contrarian backdrop to fuel a short squeeze.
