Short sellers came back to life in March, as bearish bets on the S&P 500’s companies increased by nearly 5%.
The increase in short interest activity is the result of an increase in volatility — unsurprisingly, some investors are getting more nervous that the recent highs are unsustainable. Given some of the short-term market indications, we can’t disagree, but remember: Today’s increases in short interest represent tomorrow’s short squeezes.
A short squeeze occurs when a highly shorted stock begins to move higher, putting pressure on the short sellers as they still have a liability to repay the shares they’ve borrowed. As would be expected, short interest increases when the market declines, setting up even more potential to jump into positions before the shorts start feeling the heat.
With that in mind, we’re always scanning for bullish trading opportunities by finding the companies that have excessive shorting activity, despite retaining strong technical and relative strength leadership.
The combination of strong technical trends and rising short interest is very likely to generate market-outperforming returns.
Let’s take a look.
Short Squeeze Play #1: Jarden Corp (JAH)
Click to Enlarge The consumer discretionary sector has been one of the top performing groups of the year, besting the S&P 500’s performance more than twofold. Among the top performers within the discretionary stocks is Jarden Corp (NYSE:JAH), as the stock creeps above a 10% year-to-date return.
Short sellers are loading up on bearish bets as the last two-week period saw an 18% increase. The increase in shorts takes the short interest ratio on JAH above 6 for the first time since September 2014, just before the stock posted a bottom at $28 and initiated a 20% rally.
Current technical trends support the stock price at $52.50, and a clear path to an upside price of $60 is reasonable as the shorts come out of the wood to cover their positions. With earnings just a month away and the stock moving to new highs, the shorts will start to cover early rather than later.
Given this, we’re targeting a short squeeze move to $60 before the end of the second quarter.
Short Squeeze Play #2: Darden Restaurants, Inc. (DRI)
Click to Enlarge Don’t call it a comeback — Darden Restaurants, Inc. (NYSE:DRI) has been lighting it up for the last six months after getting the fundamentals back on track and posting positive earnings surprises.
The short sellers are pounding DRI stock, despite it being 18% higher year-to-date. Short interest rose 11% in the past period, taking the short interest ratio above 6 for the third time in less than six months.
Each instance of similar readings have resulted in returns that more than double the S&P 500’s over the following month.
Short Squeeze Play #3: Accenture Plc (ACN)
Click to Enlarge Investing in the technology sector has been difficult lately as the sector has been splintered by performance. A look at the technology ETF, Technology SPDR (NYSEARCA:XLK), shows that an even number of companies are making new highs and lows over the last 12-month period.
Those technology companies that are performing are seeing increases in short interest, a sign that the “Wall of Worry” is in place and ready to help some of the sector move higher. Accenture Plc (NYSE:ACN) shares are included in this group as short interest has been on the rise over the last three reporting periods.
The last time we saw short interest in similar levels was in late 2014, when shares went from $82 to $93 on a short squeeze rally. The recent break above $92 will get the shorts running to the market to cover their losing positions. We’re expecting a move toward the $105 level over the next two months as a result of the squeeze, making ACN one of the “best in breed” names among tech stocks.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.