3 Stocks Just Itching for a Short Squeeze

by Johnson Research Group | September 27, 2013 9:48 am

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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:

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Transportation stocks have been gaining ground on the broader market again as we head into the seasonally strong fourth quarter. UPS (UPS[2]) has been among the relative leading companies within the sector, doubling the performance of the iShares Transportation Average ETF (IYT[3]) 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.

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Natural gas and related companies have been on a tear again, including ONEOK (OKE[4]). 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.

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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[5]) 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.

  1. Compare Brokers: https://investorplace.com/options-trading/broker-center/
  2. UPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=UPS
  3. IYT: http://studio-5.financialcontent.com/investplace/quote?Symbol=IYT
  4. OKE: http://studio-5.financialcontent.com/investplace/quote?Symbol=OKE
  5. HOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=HOG

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