Those of us who watch short interest are starting to get nervous and feel a few of the hairs on the back of our necks stand up. The reason? At the aggregate level, shorts are getting out of the market.
With stocks hitting all-time highs, it makes sense that the shorts would be throwing in the towel and abandoning their bearish bets. It’s also a warning for those of us who monitor whether there is still a “wall of worry” in place for stocks to climb higher. Put simply, lower short interest means that there has been an erosion of that wall.
What does this erosion look like? Well, the chart below displays aggregate short interest for the S&P 500 companies since January 2015.
Note the precipitous decline in total short interest since March of last year.
Of course, the market has appreciated by more than 20% during this time. In other words, we’ve been witnessing a short covering rally of epic proportions over the last year that helped drive the markets to their new highs.
So, this means that there aren’t any more opportunities for short squeezes to drive outperformance, right?
Wrong? As with everything else, it just means we must work harder to find the opportunities, which is where our database models come into play.
The table below displays the top 15 S&P 500 stocks that still show potential for short squeeze rallies based on recent short interest and prices activity trends.
And here are the three companies from this list you’ll want to keep the closest eye on.
Stocks that Could Benefit From a Short Squeeze: C.H. Robinson (CHRW)
A great example of being in the sweet spot of the Donald Trump Rally is C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW). The company provides logistic solutions using contract motor carriers, railroads, air freight carriers and ocean carriers. The transport and logistics companies are often among those that are market leaders during an economic expansion, which is why we’re seeing attention to these stocks.
C.H. Robinson Worldwide has outperformed peers, but not by a huge margin, which is why we’ve see shorts building positions in the stock just ahead of a technical move that is now attracting the crowd.
Short interest on C.H. Robinson Worldwide was a 10% increase in the last report, just as the stock was breaking back into a technical bullish pattern. Now, shares are crossing above $78, the site of short-term chart resistance. This level, along with $80, will be the trigger for a short-covering rally that will drive the stock towards $90.
Stocks that Could Benefit From a Short Squeeze: Deere & Company (DE)
Among the industrial stocks that stand out in our short squeeze filters is Deere & Company (NYSE:DE). Short interest on the heavy machinery company increased by 3% in the last report. This took the short interest ratio to a reading of 9. This is well off the highs that the company saw last year, but still indicates a short covering rally is likely.
Last week, Deere & Company reported better-than-expected earnings. Initially, the market reacted with higher prices that faded later in the trading session. The charts indicate that this resistance is likely due to nothing more than round-numbered resistance at the $110 price.
For now, a trigger price for a short covering rally is $110. That will likely set a price target of $125 over the short-term.
Stocks that Could Benefit From a Short Squeeze: Cerner (CERN)
Healthcare companies have been on the ropes as traders and investors are trying to determine the risks associated with the new administration’s goals for the health care system. As a result of the uncertainty, companies like Cerner Corporation (NASDAQ:CERN) had fallen to multiyear lows, creating potential short-term trading opportunities.
Cerner shares have been in rally mode for the year to date, gaining more than 16% since the beginning of January.
Short sellers have been betting against a continuance of the trend, as short interest on Cerner rose 6% in the last report. The increase in short interest has the short interest ratio working back towards the high end of its range. The ratio above 6 indicates a higher chance of a short squeeze rally based on a technical trigger, which appears to be looming.
Cerner shares are preparing to cross above their 200-day moving average for the first time since breaking this support level in November. The move above this trendline will likely trigger shorts to start covering their positions, adding buying power to the stock.
Currently, our models are forecasting a move to $62.50 on the back of a short covering rally in Cerner shares.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.