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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 highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Strikepoint Trader and contributes to Money Morning as the Quant Analysis Specialist.