3 Short Squeeze Stocks That Are Ready to Burst

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short squeeze - 3 Short Squeeze Stocks That Are Ready to Burst

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Short sellers remain somewhat complacent as we head into the seasonally volatile month of September. The last reporting period showed that bets against the S&P 500 stocks grew by a minuscule 0.8%, a sign that market participants aren’t expecting much of a showing of the bears in September.

3 Short Squeeze Stocks Ready to Burst Before Fall
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From the market’s perspective, the lack of short interest activity has some bearish implications as complacency, especially ahead of a known period of volatility, often precedes market tops.

At the stock and sector levels, some big names saw short sellers jockeying for a decline. These are companies that our Short Squeeze models have targeted as having the potential for a rally, despite the volatility usually seen in September.

In short, these companies have and continue to see increases in bearish short positions, despite strong price trends. Eventually the price trend forces short sellers to close their losing positions.

The table above displays the top 20 Short Squeeze candidates based on our current model’s data. As always, we’ll identify the top three short squeeze stocks of interest below.

Short Squeeze Stocks to Buy: Dunkin Brands Group Inc (DNKN)

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Dunkin Brands Group Inc (NASDAQ:DNKN) has been making technical strides and leading the market higher. Year-to-date the shares are up 15% after a rough go in 2015. The company went through some fundamental restructuring in 2015 that sent shares lower to bottom in January 2016.  Since then, there has been healthy skepticism towards the recovery.

Short interest on Dunkin’ Brands stock peaked at 16 times daily volume, helping DNKN stock draw a bottom, but shares are still climbing the Wall of Worry, as short interest has yet to normalize. The most recent report showed a 5% increase in short interest to keep the short interest ratio above 6.8, keeping it on our Short Squeeze list.

Technically, DNKN stock is getting ready to punch through the $50 level, which will take out the highs from earlier this year. This break above $50 will likely serve as a psychological trigger to the shorts to start closing positions, initiating a short squeeze rally. Currently, this rally is likely to target a 10% move higher for Dunkin’ Brand shares.

Short Squeeze Stocks to Buy: American Eagle Outfitters (AEO)

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The retail sector is having a bad end-of-summer, as many of the companies within the group have reported weaker than expected earnings results and outlooks. This is the reason why companies like American Eagle Outfitters (NYSE:AEO) are standing out.

American Eagle Outfitters beat earnings expectations in August and guided in-line with analyst expectations. AEO stock benefited from the fundamental showing; however, shares have pulled back in sympathy of other poor performers in the group.

Short sellers have been active on AEO stock as the short interest is now at 7.3 times the average daily volume after a 3% increase in short positions. The ratio is off of its high last month of 11, but is still “unwinding” and shows potential for continued short covering activity to drive prices higher.

The charts show support for AEO at $18, which it may soon test, but after a successful test of that level, we see potential for the shares to break back above $18.60, which would trigger another round of covering that would likely target a price of $20 for the shares in the short-term.

Short Squeeze Stocks to Buy: Caterpillar Inc. (CAT)

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Industrial companies are moving based on some positive news on the economic front. While the global economies aren’t set into bullish action yet, the green shoots present in our domestic economy and the continued quantitative easing measures being taken around the world are driving demand for Caterpillar Inc.‘s (NYSE:CAT) products.

You wouldn’t know it because investors aren’t talking about it, but CAT stock is 20% higher for the year, besting the S&P 500 by more than three time its performance. Despite this strength, we continue to see signs of the Wall of Worry in our analysis of the shares, signaling that the rally for CAT is not over yet.

Analyst buy recommendations for Caterpillar shares stand at 0% of those covering the stock, which is well below average for the market. More interesting is the short interest ratio on CAT shares, which currently stands at 12.4 after catapulting higher in the latest report.

This is the highest short interest ratio that CAT shares have seen over more than the last two years, putting the stock on our Short Covering list, as the technical picture shows that the current consolidation is likely to result in another stage of the intermediate-term rally.

From our analysis, Caterpillar shares should trigger a short covering rally as they cross above the $85 level — a rally that is likely to drive Caterpillar shares a good 10% higher.

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


Article printed from InvestorPlace Media, https://investorplace.com/2016/09/short-squeeze-stocks-burst-cat-dnkn-aeo/.

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