Click to Enlarge Short sellers are back on the job.
The latest short interest report shows an increase of 3.7% on S&P 500 companies — the largest increase since February 2013. The increase in short interest suggests that traders are setting-up for a short-term decline in prices as one of the more volatile months of the year — October — approaches.
The additional short interest makes some sense considering that many factors are suggesting a short-term lull for the market, but as always, a number of companies have short interest that appears to be way too bearish, setting them up for a potential short squeeze.
Short squeezes occur when a heavily shorted stock rallies higher, forcing the traders to cover or close their short positions by buying shares back. The ironic twist: Those short sellers end up creating more buying pressure to move the stock even higher.
Our scans identify stocks that remain in a technically strong pattern while seeing increases in already high short interest, resulting in stocks that have a higher likelihood of seeing a short squeeze rally. The accompanying table identifies the top 10 S&P 500 companies likely to see a short squeeze, and we’ll take a closer look at three:
Click to Enlarge Transportation stocks have been gaining ground on the broader market again as we head into the seasonally strong fourth quarter. UPS (UPS) has been among the relative leading companies within the sector, doubling the performance of the iShares Transportation Average ETF (IYT) by double.
Despite the fact that UPS is driving higher, short interest has been piling up since July. Watch for a break above the $92 level to start shaking the shorts out of their positions.
As a kicker, only 48% of the current analyst recommendations rank the stock a “buy,” meaning that we also could see upgrades help move UPS higher.
Click to Enlarge Natural gas and related companies have been on a tear again, including ONEOK (OKE). In July, OKE shares jumped more than 20% on a positive earnings report. Since then, the shares have been trading in a range between $50 and $54.
However, short interest has gone through the roof ahead of the next earnings report, scheduled for Nov. 5.
OKE shares recently rallied from support at their 20-day moving average — a sign that technical traders might be buying the stock. A break above $54 is likely to trigger a short squeeze.
We like Oneok stock to challenge the $60 level in the fourth quarter.
Click to Enlarge Consumer discretionary stocks have been on the rise as the economy continues to show improvements and consumer sentiment is near its recent highs.
Harley-Davidson (HOG) shares are among those that have been leading the discretionary stocks higher, returning almost 20% during the past three months while the S&P 500 has gained about 5%.
But the shorts are trying to call a top on this outperformer, as short interest rose almost 30% during the past two weeks, driving the short interest ratio to more than seven times the average daily volume for the shares.
A short squeeze rally is likely to help HOG head toward its all-time highs just above $75.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.