A number of indicators are telling the story of a splintered market these days. From relative strength to new highs and lows and correlation measures, many of the indicators that we monitor are suggesting that the days of a rising tide lifting all stocks are over.
Click to Enlarge And the days of successful stock picking being the only way to generate consistent returns are back.
Of all of the data sets we monitor, the fractured market becomes no clearer than in the short interest figures. Over the latest two-week reporting period, short interest declined in Nasdaq and Dow Jones Industrial Average components while short interest increased in S&P 500 index companies. The disparity between the shorts’ actions on the major indices suggests that investors are truly confused.
That’s good for us. Confusion in the investment world almost always translates into a good situation for those of us who are willing to find out what’s actually going on.
The short data is showing declines in a number of the relative strength leaders, suggesting these stocks might not have any room to climb higher on the “wall of worry.” That has negative implications for the overall market (a subject we’ll tackle later), but for now, let’s focus on the stocks that could lead the market over the next few months.
The table above displays the most recent short interest data, identifying 10 companies that currently fit the criteria for potential short squeeze rallies. These rallies are often triggered by a slight move higher that causes short sellers to close their losing positions — naturally, by buying shares, which can turn into a virtuous cycle that sends shares significantly higher.
Here are three stocks we particularly like for their short squeeze potential right now:
Short Squeeze Stocks: Arris Group (ARRS)
Communications and media companies continue to see strong performance as high-speed communications changes the delivery of multimedia content to consumers. Arris Group (ARRS) is in the middle of this business, providing set-top boxes and other solutions for digital end-users.
Business has been good for ARRS, which has met or exceeded analysts’ earnings expectations each quarter over the last four years, though revenue has tapered over the past year.
Short sellers have been adding to their positions over the last month, with the short interest ratio increasing to 6.8. Arris shares saw a similar spike in March, ahead of last quarter’s earnings results and April’s 20%-plus rally.
The increase in short interest ahead of the next earnings report, expected to come out July 29, suggests that the stock is setting-up for another earnings-triggered short squeeze rally. Support for ARRS sits at $32.20, thought the short-term trendlines are suggesting that this shouldn’t come into play before the earnings report.
Our model suggests a high likelihood that ARRS stock will move to the $36 level again over the next two months.
Short Squeeze Stocks: Amicus Therapeutics (FOLD)
Healthcare stocks continue to lead the market higher over the last month. Among those breaking to new highs is Amicus Therapeutics (FOLD), a biotechnology company focusing on next-generation medicines for rare and orphan diseases.
FOLD stock is trading more than 50% higher on a year-to-date basis, outpacing the market and its peers by high multiples. The gains are drawing in short sellers, who have taken the short interest ratio to its highest reading in two years, suggesting that a short squeeze is building.
The “trigger” for the short squeeze is likely to be a move above $13. While this is a move of almost 5%, the volatility of the stock suggests that it could be a very short time before we cross this line.
The volatility also suggests that Amicus will quickly move even higher once the $13 level is breached.
Short Squeeze Stocks: CNO Financial (CNO)
Insurance and financial companies are set to benefit from higher interest rates, so as a result, the fundamentals favor these companies as we move into the second half of 2015.
From a relative strength perspective, CNO Financial (CNO) has outpaced the insurance sector, more than doubling the YTD returns for the SPDR S&P Insurance ETF (KIE). The outperformance appears to have gone unnoticed by the short sellers as the short interest ratio for CNO is now at its highest levels in almost two years. As of the latest short interest release, the ratio registered a reading of 6.8, which means it would take nearly seven days of volume to cover (buy back) current short positions.
CNO shares have pulled back from their recent highs while successfully staying above the stock’s 50-day moving average, which is ascending (a bullish technical pattern). A move back to, and above, the recent highs around $18.70 will likely initiate a short covering rally as the short sellers rush back into the market as buyers to cover their losing bets. This will likely slingshot CNO stock to the $20-$21 range.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
