Reports of the death of short sellers have been greatly exaggerated.
Click to EnlargeAll respect and apologies to Mr. Twain for the use of his quote, but the market has been assuming that short sellers have been the main catalyst behind the latest rally in stocks as they’ve been squeezed out of the market. According to the latest data, the short sellers are very much alive and well.
Historically, this has been an effective measure, but not now.
Short interest on the SPY shares have been on the decline and are heading towards multiyear lows. On the surface, this suggest that short sellers have been squeezed from the market. Looking deeper into the data tells another story.
Total short interest for the S&P 500 constituent companies has actually been on the rise for the last six to nine months, while short interest on the SPY shares have been on the decline. The disparity between these trends identifies the fact that there are still a large number of short squeeze opportunities for us to profit from.
The table above displays 20 companies within the S&P 500 that are currently on the potential short squeeze list. These stocks have seen increases in already relatively high short interest while exhibiting technical strength. This and other measures that our model monitors identify these stocks as likely to see a short covering rally soon.
The following are three short squeeze stocks to look out for.
Short Squeeze Stocks: Newell Rubbermaid Inc. (NWL)
Short Interest Ratio: 10.4
Newell Rubbermaid Inc. (NWL) is best known for its various consumer-branded containers. Improving consumer sentiment and spending continues to fuel sales of its products, resulting in an impressive relative strength move against the market.
Over the last three months, Newell Rubbermaid shares have rallied 20% against the S&P 500’s 11% move, putting NWL among the best performers. Despite the performance, short sellers have bet against Newell Rubbermaid shares heavily, taking the stocks’ short interest to its highest level in more than two years.
With a short interest ratio of 10.4, after another 4% increase in short interest, Newell Rubbermaid stock is setup for a short covering rally. The trigger price for a covering rally is likely to be the $46 mark, just a short shot from current prices. Our models suggest the covering rally will lift shares back above the $50 level.
Short Squeeze Stocks: Paychex, Inc. (PAYX)
Short Interest Ratio: 8.3
Monthly payroll data continues to show growth in the jobs market, which means that Paychex, Inc. (PAYX) and its competitors are busy. PAYX provided another quarter of positive earnings and revenue results on March 30, reaffirming their current fiscal year outlook for revenue.
Paychex stock has been trading in tandem with the S&P 500 lately, though the longer-term look back shows strong relative strength against the market. More recently, the shares have run into some resistance at $54, but we’ve seen a consolidation that may help PAYX break through this resistance on the next rally.
Such a rally will be problematic for short sellers as the short interest ratio stands at 8.3. A break above the $54 level will start squeezing the shorts, forcing the stock into a covering rally. In addition, only 10% of the analysts covering the stock have it ranked a buy, despite the fact that the stock has been moving back towards its all-time highs at $60.
A single upgrade or a move back above $54 is likely to trigger the next short covering rally, which will likely target the $60 level over the next four to six months.
Short Squeeze Stocks: Schlumberger Limited. (SLB)
Short Interest Ratio: 6.8
Sentiment towards anything associated with Oilfield Services is down as investors continue to avoid the industry. Despite this, there are some trading opportunities within the group.
Short sellers are drawing a line on the largest of the Oil Services companies as Schlumberger Limited. (SLB) stock saw another increase in short interest in the last report, maintaining a short interest ratio near 7 for the third month in a row.
Recently, Schlumberger stock has rallied 18%, doubling the S&P 500 performance since late January. This indicates that the short sellers are feeling some pressure and are likely close to getting squeezed out.
This weekend’s OPEN meeting may result in little production change, which may see its shares pull back slightly, but with technical support in place at the $75 level, it appears that it will only be a matter of time before SLB stock gets the benefit of a covering rally.
Our model targets a move to $82 as a result of a short covering rally, but the long-term prospects for SLB stock appear brighter than their peers.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.