After unwinding short positions for the last two months, we’re starting to see the short sellers add bearish bets as the S&P 500 is teetering at potential resistance, again, at 2,100.
The latest short interest data release shows that shorts on the S&P 500 grew by 2%. While small, it indicates pessimism will be building in the market as we head into the summer swoon.
Right now, the increase in broad market shorts doesn’t provide a tradable opportunity. In fact, it’s a bit of a bearish signal, but digging deep into the stock-by-stock data uncovers a number of stocks that are set up for potential short squeeze rallies.
Not by chance, the larger short positions are being found in the utility, health care and consumer products sectors, as these are the stocks that remain lofty. However, our models suggest that certain stocks within these groups are more likely to outperform their peers and the market, putting them at the top of the short squeeze list.
The following are three short squeeze stocks to keep an eye on.
Stocks to Buy for a Short Squeeze Boom: Dr Pepper Snapple Group Inc. (DPS)
Short Interest Ratio: 8.0
Dr Pepper Snapple Group Inc. (DPS) has been one of the unsung heroes of the market over the last two years, as it has quietly doubled in price since 2014, leaving the market in the absolute dust. Despite the outlandish performance, which has been driven by strong fundamental growth, the company continues to attract nothing but bears.
Short sellers increased their positions on DPS stock by 2% in the last report, putting the current short interest ratio at 8.0.
This is the highest short interest ratio for the stock since July 2015. The stock saw some weakness during this period, but eventually the short squeeze drove this stock more than 20% higher in less than three months.
DPS stock is positioned to benefit from support at the $91 level and a move back above $95 will likely serve as a catalyst for the next short covering rally to begin, which sets a target of 15% over the next two months.
Stocks to Buy for a Short Squeeze Boom: Express Scripts Holding Company (ESRX)
Short Interest Ratio: 13.6
The health care sector has been shakier over the last year as regulatory concerns are driving investors to rethink their holdings among the sectors. One group that has been able to hold it together among the sector are the insurers and companies that provide insurance services, such as Express Scripts Holding Company (ESRX).
For the year, Express Scripts is trading roughly 14% lower, which deserves some pessimistic sentiment. That’s exactly what the data is showing as the stock’s short interest ratio is at 13.6 and quickly on the rise. This indicates that the shorts are piling into the stock with expectations of another breakdown.
ESRX has spent the last three months building quite a technical base that is now beginning to gain some upside momentum. The stock has sound support at the $70 level and it will start to threaten the short sellers as it inches close to $80.
We’re holding a target of $92, as the shorts will start covering their shares and add to the buying pressure and strength of Express Scripts shares.
Stocks to Buy for a Short Squeeze Boom: Realty Income Corp (O)
Short Interest Ratio: 12
Real estate investment trusts are coming back with a vengeance, as the interest rate situation remains cloudy. Investors that are still foraging for portfolios yields are gravitating back to dividend payers like REITs.
Realty Income Corp (O) shares are up more than 15% year to date, which should be attracting some bullish attention. For now, the stock has only gained doubters as the short interest ratio is now back to the same levels that we saw in December of 2015. The current short interest ratio of 12 was seen on more than one occasion in 2015, each preceding a significant rally in the stock.
The charts show that O shares are pressing against a little resistance at the $60 level, but once it’s above this mark, we should see the stock rally relatively quickly to $62, which will serve as the trigger for its next short covering rally.
We expect that rally to lift O shares to the $68 to $70 level over a period of one to two months.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
