The latest short interest data was released last week, revealing several trading opportunities. Overall, short interest on the NYSE and Nasdaq exchanges dropped slightly in the second half of March as short positions on each of the exchanges dropped around 1.5%.
The drop in macro short interest should be expected, as the market spent most of March pushing higher. Despite the drop in aggregate short interest, there are companies and sectors (ETFs) that are attracting the short sellers, potentially providing bullish opportunities for investors.
First, let’s understand why this information is valuable to us. Short sellers are investors, or investment professionals, that are actively betting against a stock or Exchange Traded Fund (ETF).
By monitoring short interest, we are often able to find situations where a potential short squeeze is developing, thus providing bullish investors with excellent trade fodder. (A “short squeeze” is when investors who previously sold their shares short close out their positions by buying the stock back, creating an influx of buying demand).
Taking a look at the most recent short-interest data, there are more than a few stocks and ETFs that are presenting themselves as potential short-squeeze candidates. Every two weeks (when the short interest data is released) we filter through the data to identify potential bullish trades. Typically, we’re looking for stocks that meet the following criteria…
- A stock or ETF is trading in a strong technical fashion, typically above its 50-day moving average.
- Short interest on the stock or ETF is relatively high
- The fundamental outlook for the stock is relatively positive
In a nutshell, these guidelines can be summed up by saying we look for stocks and ETFs investors are shorting when all other indicators are telling them they should be buying. While not always the case, many of these situations wind up pressuring the short sellers to turn into buyers to cover their positions when the stock or ETF continues to press higher (a/k/a a short squeeze).
The table below identifies 10 companies that have seen some relatively active short-interest activity despite recent strong technical trends. In many cases, the recent weakness in the market has taken some of these companies just below their respective 50-day moving averages, thus providing the technical crowd a good opportunity to move into these shares on the recent pullback.
From our perspective, these companies are good short squeeze candidates given that a move back above their 50-day moving averages will serve as notice to the shorts that the shares prices are likely to rally again, providing a catalyst for short squeeze rallies.
A couple of notables about this group of ten equities…
- The Retail (NYSE: XRT) and Consumer Discretionary (NYSE: XLY) ETFs have seen increases in short-interest activity during the first quarter, despite the fact that these ETFs outperformed the S&P 500. Historically, these sectors are leadership groups during market rallies when the economy is showing signs of recovery, as we’ve seen lately. The short-interest activity represents the Wall of Worry that we like to see in relative strength leading sectors.
- Lenar (NYSE: LEN), D.R. Horton (NYSE: DHI) and Masco Corp. (NYSE: MAS) are all part of the Homebuilder Sector, a group that has returned roughly 23% versus the S&P 500’s year-to-date return of 10%. With some fundamental improvements in the housing department starting to show through, it is likely that the group will continue to see increased bullish activity. The positive fundamental and technical backdrop means that the shorts in the housing stocks are likely to start getting squeezed.
We’ll update this list with its notables again in a few weeks when the new short interest data is released.
As of this writing, Chris Johnson does not own any securities mentioned here.
