From the desk of Steve Strazza @Sstrazza
As our Premium Members already know, we have a laundry list of scans that we run internally on an almost daily basis.
Different market environments, naturally, are more conducive to certain scans and less so to others.
For example, running our “Short Scan” right now is an absolute waste of time (which in itself is information about the current state of the market). On the other hand, our “Minor Leaguers” is perfect for the current environment due to its focus on Small-Cap stocks.
Our “Squeeze Scan” is also absolute gold for the current market. While Gamestop $GME is stealing all the thunder these days, it’s not the only stock being propelled higher by short covering. It’s happening more or less across the board in the most shorted names.
In fact, if you were to treat these hated stocks as a basket, they’d be outperforming even the strongest industry groups right now.
JC and Howard discussed the topic in this week’s Happy Hour video which you can watch here.
This chart is from our colleague, Ari Wald of Oppenheimer. It is an excellent depiction of just how well these heavily-shorted stocks have performed since the start of the year.
Take a good look a the graph in the lower left-hand corner of the chart. What this ultimately tells us is that there is a powerful positive correlation between performance and short-interest right now as the most-shorted stocks are up a whopping 34% month-to-date while the least-shorted names are slightly lower over the same period.
This isn’t just some small sample size either – these stats are based on the Russell 3000 which represents about 98% of the total US stock market.
The bottom line is simple: The higher the short interest, the better the performance this year.
And, guess what… since our “Squeeze Scan” is designed to take advantage of this exact trend we just had to share it with you!
So without further adieu, let’s take a look at what’s popping up on our radar right now and outline setups in some stocks we think investors can squeeze profits out of in the weeks and months ahead.
The table below only includes names with a short interest in excess of 20% and days to cover ratio of at least 5x. As always, there are also volume and liquidity filters, as well as technical overlays.
The list is sorted by short-interest, and then further by proximity to 52-week highs. This allows us to focus on stocks showing momentum in the near term.
The reason these short-term technical filters are necessary is that while a high short interest can act as an eventual tailwind to drive prices higher, something else has to spark the squeeze in the first place. An earnings beat, positive headlines, analyst upgrades, even a technical breakout – it doesn’t matter, the stock just needs to rally.
Then once it begins to rise, the domino effect of short-covering comes into play and can cause a parabolic move higher.
So, just because a stock is heavily shorted doesn’t mean there is going to be a short-squeeze. The stock can go to zero without it ever occurring. We see this all the time.
Instead, it is the combination of short-term momentum and high short interest that are needed… Once these things are in place, the stage is set for an epic squeeze.
Let’s look at some of the names that stood out in our scan now.