Aggregate short interest on the S&P 500 companies rose for the third reporting period in a row. This is the first time that we’ve seen a build in short interest over three periods since May of 2016, ahead of a relatively short and fast correction in the market.
Today, the additions to total short interest represent some concern, as the market is showing weakness as we head into the first-quarter earnings season. That said, there are a number of companies that are showing signs that the “wall of worry” is strong enough to maintain their rallies.
We’re taking a look at the model results from our short interest analysis of the S&P 500 companies to identify those that have the potential for short squeeze rallies as prices continue to edge higher. The table below identifies the top 15 companies that matched our short squeeze criteria.
After that, we chose three companies to highlight, ones that look primed to push out their short sellers.
They are, in no particular order…
Stocks About to Get a Boost from Short Sellers: Leggett & Platt (LEG)
Home builders and home-building-related stocks have been on the rise as the outlook for the economy and consumer spending continue to improve. Leggett & Platt, Inc. (NYSE:LEG) shares were one of those that spent the entirety of the last home-building-driven rally leading the market higher, and it looks ready to do it again.
Click to Enlarge Leggett & Platt shares are only trading about 4% higher on a year-to-date basis, as the stock has been jammed in a trading range. The trading range has brought the short sellers into the mix, as we’ve seen short interest on LEG shares increase to their highest levels in more than two years.
The current short interest represents roughly 10 times the average daily volume for Leggett & Platt stock, indicating an elevated probability that a short squeeze will occur — all that’s needed is a trigger.
That trigger may come in the form of a breakout of the stock’s range. The stock is in the process of challenging $51. A move above this mark would break the top of the range that has been in place since December, triggering a potential covering rally. Our models are suggesting a target of $56 at the hands of short sellers covering their positions.
Stocks About to Get a Boost from Short Sellers: Cerner (CERN)
Healthcare companies have been stuck in a rut as possible regulatory changes have been uncertain. The recent failure to replace Obamacare has resulted in some strength in the sector, including Cerner Corporation (NASDAQ:CERN) stock.
Click to Enlarge Year-to-date, Cerner shares are up more than 25%, but you wouldn’t know it by looking at the number of shares that have been shorted. Short sellers increased their bearish bets on the stock over the last two weeks by 4%. This took the current short interest to its highest readings in more than two years.
The high short interest results in a short interest ratio of 8.8, or nearly 9 days to cover, which is above our model’s trigger level indicating a higher-than-normal probability of a short covering rally.
In Cerner’s case, the price trigger for a covering rally appears to be any move above $60. The stock has spent the last two weeks bumping its head against this round numbered resistance, rejected each time.
A break of $60 will start to shake the short sellers out of the stock as the chart’s next target price is $65. Our model suggests a similar level for a short covering rally to target.
Stocks About to Get a Boost from Short Sellers: Microchip Technology Inc. (MCHP)
The semiconductor sector has been on fire for more than a year, leading the technology and broader markets higher. Microchip Technology has been right there as the stock has gained more than 50% over the last twelve months and 15% so far in 2017.
Click to Enlarge Microchip Technology is holding strong trendline support as the shares are above their 50-day moving average which is also trending higher. Our historical back testing shows that this combination is bullish for a stock over the intermediate-term (one-to-three-month) outlook.
Short sellers aren’t aware of the performance, though, as we’ve seen bets against Microchip Technology increase an incredible 50% since the beginning of the year, while the stock has been in strong rally mode. This builds a strong case for a short covering rally to move Microchip Technology even higher.
The stock surged above $76 after its last earnings report, but quickly moved back below $74.50, which has acted as resistance since then. This level is the likely trigger price for a potential short covering rally.
Microchip Technology won’t announce earnings until May 3, but a “buy the news” rally is likely to occur before that date based on the company’s performance last quarter. Given this, we would definitely expect to see them making a covering rally materialize over the next few weeks.
As of this writing, the Johnson Research Group did not hold a position in any of the aforementioned securities.