Our most recent look for short squeeze candidates revealed some good news for the short sellers: Namely, for a couple of weeks, they have been on the ball, closing their positions while the market was down.
Click to Enlarge Aggregate short interest on the S&P 500 dropped by 4% in mid-April as short sellers locked in profits from the small 4% decline in the market. But to some degree, the declining short interest represents a concern — if the short sellers are really paring their bearish bets, it could be a sign that the market is beginning to become complacent, which often precedes intermediate-term market weakness.
For now, as always, we like to target sectors and stocks that continue to see increases in their respective short positions, especially when accompanied by strong technical pictures.
A great example of this is utilities, represented by the Utilities SPDR (XLU). In the last reporting period, the companies that make up the XLU saw flat short interest growth — not exciting until you consider that short interest in utilities was already teetering at some of its highest readings over the last two year.
That persistently high short interest is waging a battle against a strong technical backdrop, increasing the odds that these stocks will see short squeezes over the next month or two. We expect not only utility companies, but the XLU itself, to press toward new all-time highs on the strength of short squeezes.
Outside utilities, several individual stocks are drawing our attention as potential short squeeze candidates. The table above identifies the top 20 companies from our short squeeze filter, but read on as we look more closely at three especially compelling targets.
Short Squeeze Candidate #1: Biomed Realty Trust (BMR)
Click to Enlarge The biotech sector got slaughtered during the past few months as a price bubble finally got popped. While there are very few biotechnology names that are still of interest to us at this time, there are some biotech-related plays that do make sense.
One of these is the Biomed Realty Trust (BMR). This REIT owns and manages properties for biotechnology and pharmaceutical companies as well as scientific research institutions, government agencies and other entities involved in the life science industry.
BMR has smoked the S&P 500 in terms of performance, returning 15% year-to-date while also paying a 4.8% dividend. Our research suggests that real estate and dividend-yielding investments will likely remain in favor as the FOMC signals no clear end to the low-interest-rate environment. This means the shorts will start feeling the pain of their bets against BMR, helping to spark a short squeeze rally that will help the BMR shares move higher toward $24 level.
Short Squeeze Candidate #2: Martin Marietta (MLM)
Basic materials companies have in general bested the S&P 500’s returns, though not to the degree of MLM shares, which are up more than 25% year-to-date. Of course, the shorts were wrong on this one and are currently unwinding their short positions.
After taking a short dip below its 50-day moving average, MLM shares are on the rise again and are likely to take out the $130 mark in the short-term.
Our technical charts show that $140 is the next resistance level for shares, which would be a 12% move from today’s close and would trigger even more covering as a short squeeze develops.
Short Squeeze Candidate #3: Laredo Petroleum (LPI)
Click to Enlarge Oil and gas exploration companies continue to benefit from increased demand associated with the growing economy.
Laredo Petroleum (LPI) has seen some volatile trading during 2014 but the recent surge in prices will start working against the shorting crowd, which has grown during the past two months. The stock has spent the past two weeks challenging resistance at the $30 level after breaking this psychologically significant round-numbered price level two weeks ago.
We’re expecting that a sustained move back above $30 will fuel the next short squeeze rally to the $33-$34 range.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.