Short selling increased again in June as the most-hated rally in recent history continued its march higher. Short selling on the SPDR S&P 500 ETF (SPY) grew by more than 5% as the bears are digging in their heels, which in turn is setting up a few short squeeze opportunities.
Click to Enlarge In our opinion, the increase in short interest is helping to maintain the low-volatility market melt-up as these traders are likely closing out their position on the slightest pullbacks, offering an inventory of buying power. This take goes against our expectations that the market is likely to see a short-term correction soon.
While we still think that it is important to maintain a hedge on one’s portfolio for the likely correction, it is also important to remember to not ignore the bullish trade opportunities at the stock-by-stock level. The market continues to provide ample opportunities for those watching for short squeezes.
Here’s a look at three potential short squeeze candidates:
Short Squeeze Candidates – Cablevision Systems (CVC)
Currently, CVC stock is trading above its 50-day moving average, which is trending higher — a sign of momentum. With a short interest ratio in excess of 20, any move higher is likely to spark a short squeeze.
We like a target of $20 in the short term, which represents 13% upside from here.
Short Squeeze Candidates – 3D Systems (DDD)
Now, however, these companies are showing life again as applications for this technology are becoming a reality.
DDD short interest is running more than nine times the average daily volume, signaling the likelihood of a covering rally. 3D Systems’ stock is in the process of breaching the technically important $60 level. A successful break above this price will likely start a short squeeze, driving the price toward our short-term target of $70, which lies about 17% higher.
Short Squeeze Candidates – ADT Corp. (ADT)
Despite the strength, the short sellers have been piling on the bearish bets, driving ADT’s short interest ratio of a reading above 20, its highest in more than two years.
ADT’s stock price is now filling the gap from the drop caused by February’s disappointing earnings, just as we head into the next earnings season. We expect the shorts to start covering and driving the price higher as the shares break above the $35.
Watch for a short squeeze to drive prices toward the $38 level before the end of July’s earnings announcement.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.