It looks like the short sellers have taken the holidays off.
Short interest on the S&P 500 companies declined just 0.5% over the past two weeks — the third straight reporting period of little to no activity from the bears. This suggests that the market may have hit a level of complacency as it rolls into the year-end trading period.
Click to Enlarge Complacent sentiment would be a bad thing for a market that is already lacking direction since the short, strong recovery rally in October. Compounding the situation are the flagging technical indications suggesting that the trends on many key indices are beginning to head south.
Still, if you want excitement, you can find it on the single-stock level.
We recently mined short interest data, and along with a number of technical trends, we’ve found a batch of potential short squeezes that are likely to buck the market’s negative trend — and soon — as short covering rallies push prices higher.
Short Squeeze Plays: Cree, Inc. (CREE)
Cree stock is finally drawing a long-term bottom just above $20 as the company is emerging from weak performances on the revenue front.
From a technical perspective, $20 marks the bottom of the long-term range for Cree stock, meaning that the technical buyers are likely to start accumulating shares. The technical trendlines also support buying for the technicians as the critical trend of the 50-day moving average is now moving higher — a bullish indicator.
Short sellers have built significant short positions against Cree shares as the short interest ratio for the stock is now hovering near its highest readings since December 2008. For some perspective, the short interest ratio has been elevated ahead of each rally from the $20 level.
A move above the $29 mark will trigger a short covering rally that is likely to draw the price of Cree stock above our intermediate-term price target of $33 — a move of about 18% from current prices.
Short Squeeze Plays: Wayfair Inc (W)
Click to Enlarge Like other online retailers, Wayfair (W) is taking market share in the home products market. This consumer discretionary stock’s performance of more than 30% lands it among some of the stronger performing stocks in the fourth quarter, and at 145%, it’s also one of the best stocks of 2015.
Short sellers are building their positions against Wayfair shares as the stock’s short interest ratio hovers just under 12. With W stock pressing against a glass ceiling at $50, we expect a short covering rally to engage on any move higher.
The last short covering rally drove shares from $36 to $45 in late September 2015. We expect the approaching rally to carry Wayfair stock to a $56 price target — a 15% move from today’s price.
Short Squeeze Plays: Verisign, Inc. (VRSN)
Click to Enlarge Known for Internet services and securities, Verisign (VRSN) stock has gained more than 50% in 2015 as demand for Internet security has helped grow revenue at a steady 5% and gotten earnings to meet or beat estimates in seven of the past eight announcements.
The charts show technical support at the $85 level as the stock has been taking a bit of a rest. That said, any move higher is likely to continue the short squeeze that was already under way after the stock surged above $80.
We expect the continued short squeeze rally to carry Verisign stock above the $100 mark — or 14% higher — during the first quarter of 2016.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.