Believe it or not, short sellers are going to lend a hand to a select group of stocks — even though the market has gone their way.
Click to Enlarge Usually, we talk about high-short-interest stocks as a strictly contrarian indicator. The way it works is that high-short-interest stocks that continue to rise force short sellers into the market to cover their losing positions. That’s one of the most effective contrarian indicators out there.
That said, stocks that decline with high short interest also see a benefit.
Like anyone else, short sellers want to close profitable positions, which means these stocks will see buying interest on the dips (or rips, in the case of the recent market) as short sellers lock in their profits.
With this in mind, we’ve adjusted our normal screens of the latest short interest data to look for companies that have higher short interest ratios, that have declined, but that are still above key long-term support.
This yields a list of stocks that are more likely to see sharp, tradable bottoms at the first sign of any market strength.
Stocks the Shorts Will Save: Activision Blizzard, Inc. (ATVI)
Video game giant Activision Blizzard, Inc. (ATVI) has been on the move thanks to positive earnings and a flurry of new games hitting the market. As a result, Activision stock is trading 85% higher than this time last year.
Short sellers have run the short interest ratio on Activision stock to 10.3, its highest level in more than two years. The shorts have benefited from the recent 13% decline and are likely to start buying the stock back soon as ATVI is still among the strongest performers in the market.
Sitting on its 100-day trendline for support, the stock looks likely to make a move higher again (quickly) on any market strength.
Stocks the Shorts Will Save: Mylan NV (MYL)
Investors are trying to pick up the pieces of a shattered biotechnology sector as the group has shed more than 20% since the beginning of the year. There are better ideas than trying to pick up the sector through an ETF, though.
For one, you could consider Mylan NV (MYL).
Mylan suffered from the fiasco with defending itself from Teva Pharmaceuticals (TEVA) last year, resulting in lagging performance, but the technicals have been on the mend as the company is posting strong revenue and earnings per share figures.
Recent short interest has blown through to one of its highest readings in the last five years. The rise in short interest has driven Mylan stock’s short interest ratio to a stunning 14.8.
Short sellers aren’t likely to take the 10% decline (half of the biotech sector’s decline) for granted and are going to start covering their winning bets. The ensuing buying should help MYL shares bounce back to their highs and lead their peers through 2016.
Stocks the Shorts Will Save: Nektar Therapeutics (NKTR)
Another biotech company likely to break free and move higher is Nektar Therapeutics (NKTR). The company’s revenue and earnings have been choppy of late, to say the least, but the charts are telling us that there are opportunities right now.
Nektar stock is among the minority of stocks within the biotechnology sector that are still trading above their respective 200-day MAs. In addition, RSI readings are now suggesting that NKTR stock is in oversold territory.
The last time it saw this setup was in October, before shares rallied from $10 to $17.50.
Short sellers will realize the risks of maintaining their short positions and start buying shares to cover up, helping to build a bottom for Nektar shares. We’re expecting this to lead to a rally that is likely to target the $16.50 level — a 15%-plus return from its current price.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
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