The latest short interest report reflects a sizable (4.5%) slide in short interest among S&P 500 companies. Looking back at the past two reports, short interest for the same group of companies has dropped by 8.9% — the largest drop since April 2014.
Click to Enlarge Lowered short interest suggests that short sellers are starting to get squeezed out of their positions as the S&P 500 continues to dance with the 2,100 level. A continuation of the short squeeze may help the market move higher.
However, one thing could prove troublesome for the market — the S&P 500 failing to convincingly break through 2,100 before the dreaded “Sell in May” seasonality takes hold.
Due to the large shifts in short interest this month, we’re including a list of the top 20 S&P 500 companies lined-up for short covering rallies. However, we’d like to highlight three stocks that aren’t on this list — because they appear to already be in the early phases of their own covering rallies.
Stocks Being Squeezed Higher: Cummins Inc. (CMI)
Industrial stocks have been on a tear from a relative strength perspective. Nobody powers industrial machinery like Cummins Inc. (CMI). Since January, Cummins stock is up more than 40% per share and it appears to be set-up for move upside.
Fundamentally, the last two quarters have shown improvement as Cummins’ earning per share results have been improving along with revenue. With construction and infrastructure spending showing signs of stability we think that this quarter may be productive for the company.
Short sellers have been adding to their bearish positions ahead of earnings. Currently, the short interest ratio for Cummins stock sits at 5.2, near some of its highest readings over the last two years. Analyst recommendations for the stock show 21% buy recommendations, leaving plenty of room for upgrades.
A decent earnings report and a move above $120 should trigger a covering rally that will move the stock another 10% higher.
Stocks Being Squeezed Higher: Nvidia Corporation (NVDA)
Nvidia Corporation (NVDA) has been on and off the short squeeze list for the last nine months. The video component maker, really a semiconductor company, is broadening its reach in the display and entertainment market which continues to grow.
Nvidia shares have rallied more than 45% since their bottom in February. At the same time, short interest has been on the rise as short sellers are betting that the stock won’t break to new all-time highs on this rally. The current all-time high is $39.67.
The short interest ratio currently stands at 7.0 and is on the decline, signaling that some shorts are already starting to cover. The company is set to announce their quarterly results next week on May 3. Over the last two years, NVDA has beat EPS estimates every quarter as well as revenue targets. With year-over-year trending higher, not lower, we’re expecting a good showing from the stock.
Watch for the $39.50 level to trigger another round of short covering on Nvidia stock.
Stocks Being Squeezed Higher: Aetna Inc (AET)
Insurance companies have been on the target of Wall Street bulls as rising interest rates are likely to translate into better revenue and earnings from their portfolios. Currently, the SPDR S&P Insurance ETF (KIE) is one of few trading in bull market territory.
Like its peer sector, Aetna Inc (AET) stock continues to trade in a bull market trend as its price remains above its 20-month moving average. The bears are giving the stock more attention as it trades toward the $117 level, one that we believe will trigger a short covering rally.
After a 15% decline in short interest, the short interest ratio is rolling over, indicating that the squeeze has started — but it’s not too late. With Aetna shares breaking through the $116 level and just completing a bullish golden cross pattern we are expecting a price target of $125.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.