It appears that short sellers have remained calm in the beginning of February as short interest on the S&P 500 companies only increased by 2%. To put this into perspective, short interest on the same companies increased by almost 17% last August when the market was making its first pullback to the 1,850 level. While the shorts have been steadily adding to their bearish bets, we haven’t seen the surge of short interest that so often marks a tradable bottom.
Click to Enlarge The lack of serious increases in short interest suggests that the market may still be too complacent for its own good. Remember: Market bottoms are made when everyone hates stocks — but the lack of short interest in the latest report suggests that we’re not there yet.
Of course, we’re always able to find opportunities at the company-specific level, where the short sellers have been increasing their bets, creating higher odds for a short squeeze rally, even in a bear market.
Short squeeze rallies are created when short sellers raise their bets against a stock that is technically strong. The covering rally is then “triggered” when the stock continues to move higher, eventually pressuring those short sellers to buy shares to cover their losing positions.
Our database filters through 7,000-plus companies’ short interest and technical data to identify those companies that are set up as short squeeze candidates. Interestingly, this week there are only six companies — identified in the accompanying table — that match the normal criteria we use. Note: ADT Corp (ADT) and Affymetrix, Inc. (AFFX) are not considered because they are tied to ongoing mergers.
Keep reading as we focus on three stocks we think have the best chance of a nice short squeeze pop.
Short Squeeze Plays: Cree, Inc. (CREE)
Cree (CREE) continues to populate a number of our model’s top recommendations. In this case, the stock is in the midst of a short covering rally, as we’ve seen short interest on Cree stock decline for the last two months, which has helped fuel higher prices.
Historically, we see a similar situation to what happened in 2012, when a short covering rally initiated a rally in Cree stock that moved it from $22.50 to $68, before the short interest unwinding had finished.
Currently, the stock is one of the few that are trading with strong technical support, helping to maintain the slow burn of the current short covering rally. Our models are targeting CREE to move above $40 — or a gain of more than 25% — over the next six months.
Short Squeeze Plays: Omnicom Group Inc. (OMC)
Onmicom (OMC) rings the short interest bell twice in this week’s report. First, the company’s short interest is coming off of its highest readings since January 2013 — just ahead of a short covering rally that drove prices from $50 to $75.
Second, the short interest ratio for Omnicom stock is showing signs that the short squeeze rally has already started. Soon to be compounded by an intermediate-term bullish technical signal, OMC will likely break above the $80 level, which will only serve to accelerate the covering rally.
Our model suggests that the OMC has a target of $90 during 2016, which is a 16% move from today’s prices.
Short Squeeze Plays: Dean Foods Co (DF)
Dean Foods (DF) stock is another of those stocks that rings the short interest bell twice.
Short interest on Dean Foods stock is at its highest levels since 2010, as short sellers have been rapidly adding to their bearish bets. In addition, the short interest ratio is on the decline, suggesting that a covering rally is in the early stages.
The technical trigger for DF’s covering rally is its break above $20 and its shares’ relative strength against the rest of the market. We expect the velocity of the covering rally to increase as Dean Foods stock moves above $20, ultimately targeting a 20% move to $23.
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