by Johnson Research Group | March 21, 2014 8:18 am
Our hunt for breakout stocks has taken us to the S&P 500, where a number of large caps find themselves high on the list of potential short squeeze candidates.
Click to Enlarge Because where there’s short interest, there’s opportunity.
The February rally shook loose a few traders who were engaged in short selling. For example, total short interest on the S&P 500 companies dropped by 0.6% for the last two-week period, suggesting a slight decline in pessimism toward the market … but not much.
Total short interest for the S&P 500 companies still lies within the top 5% of readings over the last two years, telling us that the shorts remain persistent despite the market’s strong performance. To us, that’s nothing but bullish for the market, as it’s just another brick in the “wall of worry” that stocks so often like to climb.
The accompanying table displays the top 20 S&P 500 stocks with the potential for a short squeeze based on our approach of targeting technically strong companies with growing short interest. Any one of these makes for a good candidate, but let’s take a look at three particularly compelling short squeeze targets:
Click to Enlarge Technology stocks have been taking a leadership role in the latest bull market rally as traders warm up to the prospects of the return of capex and consumer spending.
Companies like Intel (INTC), Microsoft (MSFT) and Google (GOOG) have taken the lead. But improvement in these companies will trickle down to others, like semiconductor equipment and materials supplier Teradyne (TER).
Recent short interest on TER stock climbed more than 50% despite the fact that the company is trading near its highest prices since 2011. A break above $20 will shake these short bets out of their trades, adding short squeeze buying power to an already strong stock.
Click to Enlarge Travelers are hitting the road again as evidenced by expectations for higher airline travel in 2014. That bodes well for Host Hotels & Resorts (HST), a real estate investment trust (REIT) that focuses on the operation of luxury hotels — a business that will clearly benefit from continued increases in travel.
HST has bested earnings expectations by an average of 8.5% over the last year on improving sales figures. With short sellers holding positions that are six times the average daily volume, we should expect to see a covering rally when the stock breaks above $20 which serves as a psychologically significant level as it is a round number and the site of the 2011 highs.
Click to Enlarge Another short squeeze candidate from the technology sector is semiconductor companies Microchip Technologies (MCHP). MCHP shares spent the last four months breaking to new all-time highs, which has peaked the interest of bearish short sellers.
The short interest ratio for MCHP sits just above 12, partially as a result of a drop in daily volume. The move above $47 should serve as notice for the shorts to start buying shares to close their losing positions, triggering a short squeeze and helping the stock to potentially move higher.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
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