“All Time Highs”...
Those three words can make even the most resolute short sellers nervous as they wonder if tomorrow is the day they get squeezed out of a position.
Short squeezes can turn against a short seller quickly, costing them millions.
But the painful losses for the short sellers can turn into nice profits for those investors that keep an eye out for signs of upcoming short squeezes and act quickly.
Shorting a stock can be a dangerous undertaking. You’re betting that the stock will decline and using margin accounts to do it which means that you’re leveraged.
If the stock goes down, the shorts are happy, and they pocket their profits.
It’s a totally different story when a stock goes up though. When this happens, the short sellers start feeling the pain as their leveraged losses start to add up quickly.
At some point, they must call it quits and cover their positions to limit losses.
When a whole bunch of bearish pros on a particular stock start to cover all at once – meaning they’re elbowing one another and stampeding through the narrowest of doorways and grabbing shares at every and any price – that stock can go parabolic. That’s a “short squeeze.”
It feels like we read or watch stories about shorts squeezes after they’ve made millions for investors that appear to be “in the know”. That’s not the case.
You can find short squeeze candidates using a simple approach.
Currently, the number of companies with a short interest ratio above 6 that are in a strong bullish trend is 90.
That number is lower than just two weeks ago, indicating that short sellers have been starting to get squeezed out of their positions.
Remember, short sellers only get squeezed out of their positions when the stock is going higher. They make money and stay short when a stock price is in a bearish trend.
That’s not the case now as we’ve seen a sudden rush of fast and aggressive rallies higher.
Let’s look at the top short squeeze candidates.
Short sellers have continued to call a top in travel stock, Clear Secure (YOU), with little success.
The company – who’s services allow travelers to move through security lines quickly – boasts a short interest ratio of 9.5, well above the 6.0 that signals a stock’s short squeeze potential.
We saw the short interest ratio for YOU shares spike in June ahead of a 21% rally in the stock.
Now, with shares trading 74% higher for 2024, the short sellers are increasing their bets against the stock, while calling a top in the stock.
Clear Secure shares just moved above the $32.50 price after two weeks of consolidating at the same level.
With shares looking to break through a trigger price of $35, Clear Secure stock should benefit from the shorts running into the market to close their positions.
Short-term traders can target the $40 level (14% returns) for the stock over the next 4-6 weeks.
We’ve been covering Paychex (PAYX) closely here over the last few months including the piece last week highlighting “Soft Landing” stocks (click here to read more)
While Paychex is a fundamental standout, the stock is also in the process of “climbing the wall of worry”.
That is evidenced in the short interest activity on the stock, currently lined-up for a short squeeze rally.
More than 19 million shares of Paychex are currently sold short against the stock, despite its strong technical trends and 24% one-year returns. Maybe the short sellers know something that we don’t, but those positions are now starting to hurt.
Shares of Paychex were catapulted higher over the last two weeks as better than expected jobs numbers fortified the Fed’s “soft landing” scenario with interest rates.
A soft landing would suggest that the jobs market, which has remained strong, may begin to gain steam again in 2025.
Shares of Paychex are now surging above $140 again and approaching the $145 price that should be considered a trigger price for the next short-covering rally.
Election years are a seasonally strong period for media companies like Fox Corporation as political campaigns spend their war chests on advertising. But the media blitz continues for these companies through the six months following the elections.
Shares of Fox Corporation (FOXA) are trading more than 42% higher for the year, putting them well ahead of the average Nasdaq 100 stock.
The performance is supported by strong technical trends as both the 50- and 200-day are in strong bullish patterns.
Shares recently hit resistance at $42.50, causing shares to pause and pull back by about 3% over the last two weeks. That pullback is likely to be a pause that refreshes the stock, which would be trouble for the short.
The stock holds a short interest ratio of 8.4, high enough to trigger a covering rally.
A look at the historical price chart (monthly) for FOXA shares shows a clear trigger price for a short squeeze at $42.50.
That price represents the stock’s highs from March 2021 and February 2022. A move above that price will be significant enough to get the shorts moving off their positions.
Fox Corporation will announce its earnings results for the current quarter on October 30, meaning that we mat also see a “buy the rumor” rally on the stock to compound the upside potential.
Short-term traders may consider the $47.50 price a target for Fox Corp. shares over the next 4-6 weeks, a 15% rally from current prices.