With earnings season over and the likelihood of a tax reform deal baked into stock prices, some traders are wondering if there are any other catalysts that can drive stocks higher — yes, short squeeze stocks!
It is normal to see short interest go higher as some traders try to fade a rally by increasing their bets against further gains.
Our proprietary model scans for those stocks that are maintaining strong, low volatility trends higher that may see some short-term selling, but are more likely to continue higher. This creates a volatility rally as the shorts finally move to close their positions to avoid further losses.
The following stocks are among the top choices of our most recent short cover rally contender list. Let’s take a look at the top three on our list according to the short interest data and their charts.
Short Squeeze Stocks to Buy: Verisign, Inc. (VRSN)
Software company Verisign, Inc. (NASDAQ:VRSN) posted a nice quarter of earnings results in late October and the stock has maintained its rally until we started to see some rotation out of the technology universe toward the end of November.
The reversal in Verisign and other technology issues appears to be more of a function of profit-taking than anything else as portfolio managers try to lock-in gains near their high watermarks. Considering this, the recent pullback should be seen a “healthy” and an opportunity to grab a good stock on a dip.
The rub here is that the short sellers are now on the defensive and haven’t been closing positions on the rally. The current short interest ratio indicates that it will take more than 18 days to cover current short positions. Furthermore, the current short interest represents 15% of the outstanding shares available to trade.
This indicates that a bounce in Verisign’s stock price, which has technical support at $110 from its rising 50-day moving average, will spark a short covering rally that will likely target a move to $120-$125.
Short Squeeze Stocks to Buy: Fastenal Company (FAST)
Industrial companies are in the crosshairs of the bulls considering the more recent data on economic growth. A focus on the housing and infrastructure areas of the economy means companies like Fastenal Company (NASDAQ:FAST) are in the right place at the right time.
Fastenal’s chart has been strong recently as the migration of cash into the industrial names has pumped prices higher. The shorts have got to be feeling the pain, but we’ve not seen signs that the rally has been driven by shorts covering their positions. This means that the stock is still ripe for a “covering rally.”
Short interest on Fastenal sits at an awesome 16 times the average daily volume. This sets Fastenal up for another leg in the rally.
The recent pullback, about 3.5%, is likely to engage the “buy the dip” crowd, which will then see Fastenal move back toward its highs at $55. At that point, we expect a short squeeze rally to push shares toward $63.
Short Squeeze Stocks to Buy: Snap-on Incorporated (SNA)
Another industrial name that is garnering the attention of traders is Snap-on Incorporated (NYSE:SNA). The company, well-known for its tools, has been on a tear lately by tacking more than 8% on to its price after crossing above chart resistance at $160.
This stock is in the earlier stages of a rally cycle and gaining momentum, which bodes poorly for the short sellers betting against it.
Currently, Snap-on shares are set-up to see a “golden cross” formation as the 50-day moving average gets ready to cross above the 200-day moving average. This is often seen as a bullish signal for intermediate-term outlooks.
That signal is the enemy of the short sellers that currently hold more than 15 days worth of the stock’s daily volume as bets against it moving higher.
That’s going to end as soon as the stock will start to attract buys on the current dip. Watch for a break above $173 to trigger the short covering rally that will target a move to $195.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.