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One of the primary indicators in my Best in Breed (BIB) analysis is short interest.
In fact, one of my Trading Commandments is "Short sellers are usually a bull's best friend." That's why I've delivered so many short interest–driven profit plays here on Money Morning.
Why do I love short interest? Because when it climbs above a certain threshold, it usually provides the catalyst for strong rallies.
Short interest is the sum of all shorted shares on a stock that have not been covered, or closed out, by buying back the stock.
The problem for the shorts – the bears – arises when the stock "moves against their expectations" (i.e., goes up).
That's when short sellers are forced to "cover" their losing positions on a stock. This results in unusually strong buying volume – known as a "short squeeze" – that drives a stock price higher.
The outcome is a stock typically making an unusually fast move higher. And it's these types of moves that generate oversized profits… if you can spot the short squeeze before it happens.
In my Best in Breed analysis, I screen for technically strong stocks in strong sectors. But of course, I'm more interested in whether that strength will continue.
High short interest is a good indicator that suggests the strength should last. That's because a strong uptrend typically unleashes a rush to the exits, when the shorts look to unload their losing positions.
That's when the short squeeze fires on all cylinders and the stock is propelled higher by both the technicals and the enhanced buying pressure.
Running my Best in Breed scans this morning, I found two opportunities that fit the bill.
Both have a high short-interest ratio (the number of shorted shares divided by the number of tradable shares, or the float; I consider anything above 6 to be "high") and both in strong uptrends. That should send the bears into a panic just about any day now, delivering us some juicy gains in the process.
Let's take a look…
About the Author
Chris Johnson is a quant - he's obsessed with building and perfecting mathematical models that allow him to predict, with startling accuracy, the direction of the markets, entire sectors, and individual securities. For the last year, he's been researching and building a new system that lets him move swiftly in and out of the hottest stocks in the market for life-changing gains - entirely on his own terms. The results of his newly-minted Night Trader system are nothing short of amazing.
Chris also contributes to Money Morning as the Quant Analysis Specialist.