The shorts are starting to get squeezed out of every corner of the market.
We've talked about how the rally was starting to spread from the smaller group of large-cap tech stocks earlier this week to some of the small-cap stocks that make up the iShares Russel 2000 ETF (IWM).
One of the casualties of this "wildfire" rally is the short sellers.
But that's providing some opportunities for traders like me that have been doubting the market's ability to move even higher.
The opportunities?
Well, they lie in targeting the companies that are now seeing true short squeezes.
Let's dive into this.
I love data. You know that by now I'm sure.
Data is the driving force behind the market now. What used to be a market that was dominated by opinions and rumors is now driven almost solely by data and the market's response to data.
Earnings, prices, volume, and options activity, are all part of that driving force. Of course, one of my favorite bits of data for the last 20 years has been short interest.
That's right, more than 20 years ago I did my first round of quantified studies on the relationship of a stock's price and short interest. What I found was something that I called an "ambidextrous indicator", meaning that short interest was good for stocks in both rising and falling markets.
That's why I was excited this morning to find the newest short-interest data updated in my voluminous database. It means that there is a fresh new round of short-squeeze stocks ready to make their moves.
Today, I want to focus on a short list of stocks getting ready to break out as they complete my three-part checklist as bullish short-squeeze candidates.
I'm not talking about trolling the message boards to find out which companies are "in-play" among those groups of investors. You can follow those companies - I certainly did while they were hot - or you can follow my easy process and list of short-squeeze stocks below.
Three Steps to Finding Big Opportunities in the Short Squeeze Market
- Find companies with high Short Interest Ratios. These are your short-squeeze candidates.
- What's a Short Interest Ratio (SIR)? It's simply the current short interest for a stock divided by its average daily trading volume.
- What's considered a "high" reading? In my 20-plus years of trading and research on short interest, I've nailed it down to one easy number, six or higher.
- Identify short-squeeze candidates that are in a strong bullish trend.
- Remember, higher prices are the short sellers' enemy. Knowing that we're only interested in short-squeeze candidates that are moving higher.
- The easiest way to filter the candidates down to trades is to look at each candidate's 50-day moving average. If it's trending higher, the shorts are feeling some pain.
- Determine a "Trigger Price"
- This is the price where the short sellers are likely to toss in the towel and where the short squeeze begins.
- Typical candidates: New Highs (52-week or all-time), round numbers like $20, $50, $100. The more zeros the more potential for it to be a trigger.
- My database calculates a "Trigger Price", but you can normally eye the point where the shorts start to squirm on a chart.
Once you've got all three covered, it's time to get into the stocks before the squeeze starts and the short sellers start pumping the stock higher as they fight to buy the shares back to close their losing positions.
Let's look at one of my favorite short squeeze candidates from today's Short Squeeze Report.
Redfin Corp (RDFN)...
Lennar announced on Wednesday that the outlook for housing remains positive.
This goes against a common message that we are hearing from Wall Street.
For more than a year Wall Street and the media have been calling for a bubble-style crash in housing. That bubble just hasn't developed, for one reason. Demand for inventory.
This is as simple as Economics 101. There is still strong demand for housing, despite the increases that we've seen in pricing. Add to that the fact that higher interest rates have slowed growth. But all that means is that there is still an equilibrium between the two, which is allowing the market to continue higher.
It's one of the strongest Walls of Worry I'm seeing, and it means opportunity.
More than two months ago I recommended that my readers stay long the iShares US Home Construction ETF (ITB).
Now the opportunities are spreading, like the rally in the market.
Today's opportunity is a short covering rally in Zillow Group (Z)
Shares of Zillow surged back above their bullish 50-day moving average (MA50) in May after the company provided better-than-expected earnings results for the quarter. But that hasn't stopped the short sellers from continuing to add to the short position as they keep calling for a top in the stock.
The current short-interest ratio on Zillow sits at 8.6. Even better, the short interest accounts for 13% of the stock's float or the total number of shares that are available for public investors.
These shorts sellers are on the wrong side of the market, and it's about to get worse.
That's where your opportunity lies, in their pain.
Zillow shares are breaking through the $50 price, which will mark new 52-week highs for the stock.
At the same time, Zillow will be breaking through a psychologically significant level at $50. Remember, round numbers matter.
This will be the backbreaker for the short sellers that are losing money as the stock moves higher. The shorts will begin to buy the stock back, which just adds more fuel to the fire.
The post Go long on This Short Squeeze Rally appeared first on Penny Hawk.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.