The speculative nature of short selling suggests that the shorts were probably prepping for a Greece-influenced selloff weeks ago. The most recent short interest data indicates this is the case, as a few of the widely traded index ETFs saw larger than normal increases in short positions.
Click to Enlarge Knowing where the short sellers have increased their positions can be a key component of making the right buys on major corrections like the one we’re seeing today, courtesy of Greece.
The mechanics are simple: If short sellers are increasing their positions ahead of a pullback, it means the positions are likely to have been “presold” — thus, there are likely to be fewer sellers in the market on a heavily shorted position.
Even more attractive is the other side of the trade, when the market is on the other side of this slippery “Greece spot.” These “presold” securities will be among the first to see buyers enter into the marketplace as short sellers rush to close out their profitable positions. This action alone should help to stabilize more heavily shorted positions.
Short interest data shows us that ahead of today, traders were particularly bearish on cybersecurity, banks, real estate and broader tech. From a sentiment perspective, these groups should not only see shallower pullbacks, but also the first signs of strong buying on a recovery.
In other words, if you’re inclined to “buy the dips,” this is where your nose should be.
Let’s take a closer look at where you’ll soon find some attractive entry points.
3 Dips to Buy: Purefunds ISE Cyber Security ETF (HACK)
From a technical perspective, the ETF is beating the market’s returns by a wide margin, and HACK shares are just above what should be significant support at their 50-day trendline.
The surge in short interest should enhance technical support, putting HACK at the top of our “buy the dips” list.
3 Dips to Buy: SPDR S&P Bank ETF (KBE)
Banking stocks have been benefiting from the seemingly increasing likelihood of an interest-rate hike as higher rates equal better fundamentals. SPDR S&P Bank ETF (KBE) units have led the market all year and are trading well above technical support.
The surge in short interest only improves the outlook for the banking ETF as a short covering rally will help catapult the shares from any decline.
Watch for dip-buying opportunities at the $36 and $35.30 levels.
3 Dips to Buy: Powershares QQQ Trust (QQQ)
Of the three “buy the dip” candidates, the Powershares QQQ Trust (QQQ) has the more tepid outlook, but it still represents a long-term opportunity.
Short interest on the QQQ has been on the rise and should soon match its February highs, which acted as the catalyst for a 6.5% rally. Earnings on many of the big QQQ names helped to spark the rally, and earning season is right around the corner. While a decline to $106.50 will see support, we would be more excited about picking up the shares at the $105 level for a long-term buy.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.