Trader anxiety is reaching a fever pitch as we make our way through the month of October. Recent short interest reports show a 3.6% increase in shorting activity on the S&P 500 Index component stocks over the past two weeks. The addition of bearish bets follows the previous reporting period’s increase of 3.3%, making this the largest one-month increase in short interest since the market bottomed in January.
Click to Enlarge From a contrarian perspective, the additions to short interest are bullish, which goes along with the seasonality of October as a “turnaround” month.
Recent cracks in the technical foundation suggest we could still see a healthy pullback in stocks, but with pessimism growing and seasonality favoring the next three months, such a pullback would be a buying opportunity.
Scanning the short interest at the company level, we are still seeing some opportunities, although the decline in technically strong trends at this level has the “signal group” smaller than normal.
The following are among the top fifteen short squeeze stocks to buy.
Short Squeeze Stocks: Best Buy (BBY)
Click to Enlarge Best Buy Co Inc (NYSE:BBY) has been the posterchild for an underloved performer over the past year. BBY stock has returned 30% year-to-date, absolutely leaving the other retailers, including Amazon.com, Inc. (NASDAQ:AMZN), in the dust. You would never know it, though, based on the level of pessimism the shares are seeing.
Short interest on the brick and mortar retailer has been on the rise since June and just peaked at its highest level in more than two years. The rise in short interest has Best Buy’s short interest ratio at its highest levels since April, right before shares saw a squeeze that fueled a 10% rally in less than a month.
The technicals remain strong, suggesting that BBY is likely to see the shorts start to unwind positions, sparking another short covering rally that is likely to drive the BBY stock price to the $45 level.
Short Squeeze Stocks: Teradata (TDC)
Click to Enlarge IT services company Teradata Corporation (NYSE:TDC) is in the process of transitioning into a long-term bullish trend, which will spell trouble for the short sellers that have been betting against the stock.
Short interest on Teradata has been on the rise all summer and headed into earnings season, driving the current short interest ratio to its highest level in more than a year. The increase in shorts suggests that traders feel the stock is going to fail at the $30 level after a 10% decline in shares since September.
Teradata stock has been building a base at the $30 level and looks ready to move higher as short-term technicals suggest that momentum is building. With prices just 40 cents below the round-number of $30, the shorts are likely starting to sweat a little.
Teradata will report earnings next Thursday. The past four earnings releases have see short-term spikes in the stock’s price. The company is part of a sector that has seen rising revenue and fundamental strength and reaffirmed their outlook as part of the last earnings release.
Our models suggest that an in-line earnings announcement or better will shoot shares of Teradata straight back to the top of the range at $33 with a high likelihood that a beat will cause the shorts to squeeze the stock above that range with a target of $35.
Short Squeeze Stocks: Mentor Graphics (MENT)
Click to Enlarge Another company in the information technology sector that has been attracting short sellers is Mentor Graphics Corp (NASDAQ:MENT). Short interest on MENT stock has been on the rise consistently since earlier in 2016, helping to drive prices higher. The short interest ratio has been on the decline as a result of higher average daily volume, but there’s still room for shares to get squeezed higher.
Fundamentally Mentor Graphics shares got a boost on the news that an outside firm had taken an 8% stake in the company. This was reported in early October. Since then, the shares have been on a rail, rallying more than 15%, but it doesn’t look like the rally is over yet.
Earnings are more than a month away, which is good, as we would expect to see a stock in this strong of a rally experience some profit-taking ahead of its earnings report. As such, Mentor Graphics is likely in a sweet spot to ride the success of other mid-cap technology companies through earnings-season success.
Seasonality also plays strongly to the technology sector through October and November, which will help shares of Mentor Graphics experience even more upside potential as the short sellers turn into buyers and help drive the price of its shares toward our model target of $32.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.