I went on CNBC Wednesday afternoon to discuss the latest update to short interest that was released earlier this week (watch it here). As always, there are some interesting bullish short squeeze candidates to be found among the sea of data. But first, for those who are not used to watching this valuable data, let’s start with a quick review.
What is Short Interest?
The short interest of a stock represents the number of shares that investors (short sellers) have borrowed and sold against their account.
The idea is that you can borrow the shares today and sell them at the current market price, then buy the shares back after the price declines and settle your debt of the shares. The strategy makes the short seller money if the shares go down, and losses money if the shares rally higher.
Why is Short Interest Important?
We pay attention to short because it can be a very effective indicator. Imagine that you short a stock when it’s at $20 and it moves a little higher, starting to create a loss, at some point you reach your breaking point and close the losing short position.
How do you close it? Well, adding insult to injury, you have to go into the market and buy the shares back so that you can give them back to the people that you borrowed them from to sell in the first place.
Given the simple mechanics behind short interest, the more shares that have been sold short, the more potential buyers that will be forced into the market to cover their shorts if the stock rallies. This is why we like to look for stocks with relatively high short interest.
So it’s just as easy as watching companies with high short interest, right?
No, it is important to remember that shorts are making money when the stock they have shorted is going down, meaning there is no reason to close their positions. On the other hand, stocks with high short interest that are technically strong or preparing to break out of a range are potential short-killers and could see a sudden increase in buying pressure as shorts gets squeezed out of these positions in what is aptly known as a short squeeze.
Bullish Short Squeeze Candidates
So which companies are presenting bullish opportunities based on the trends in their short interest and price activity?
We’ve prepared the table below to show you the short interest in Waste Management, Inc. (NYSE: WM), Garmin Ltd. (NASDAQ: GRMN), Moody’s Corporation (NYSE: MCO), Harley-Davidson, Inc. (NYSE: HOG), Fastenal Company (NASDAQ: FAST), CSX Corporation (NYSE: CSX) and the SPDR S&P Retail ETF (NYSE: XRT). These stocks appear ready to pop higher in a short squeeze.
In the interest of disclosure, we’ve already recommended calls on two of these companies, CSX and WM, to subscribers of our Winning Edge service, and these trades are already posting profits in just a few days.
Given the breadth of the short interest data, there are numerous ways to uncover potentially profitable trades. We’ll update you with another look at this valuable data soon.
Questions or comments on this or other indicators? E-mail us at chrisandjon@winningedgeoptions.com and we’ll try to include your input in future articles.
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