It was late October 2008, and we were in the midst of one of
the worstbear markets of all time.
Short-biased traders were making a killing, but most of us
bulls were getting hit daily. As a professional proprietary
trader, my software constantly scanned the world's markets for
unusual -- and thus potentially profitable -- moves instocks
I was alerted to a company that I never paid much attention
to: Volkswagen. Within two days, thestock price increased by more
than 180%, making Volkswagen, for a short time, the most valuable
company on Earth.
Short sellers reportedly lost more than $35 billion during
those two days. As the share price climbed, short sellers were
forced to cover their positions -- making the stock shoot up even
I was witnessing my firstshort squeeze -- the greatest in
history, as it turned out. Many nimble investors turned massive
profits during this time.
My lesson? Keeping track of short interest in a stock is a
valuable metric for stock investors.
What Is A Short Squeeze?
One of the biggest worries of short sellers is the dreaded short
squeeze. But finding short squeeze candidates can be a lucrative
tactic for investors.
A short squeeze occurs when a stock is widely shorted and
unexpected positive news or otherfactors lift the price.
Frightened by the potential of a greater loss, short sellers dump
their short positions. That results in buying pressure,
forcingshares even higher. Then additional short sellers are
forced to close their positions by buying back the stock. That
causes shares to rocket.
How To Find Short Squeeze Candidates
One of the easiest ways to locate short squeeze candidates is to
check short interest at StreetAuthority's Yahoo Finance page. The
higher the short ratio, the more likely the stockwill experience
a short squeeze rally.
I have identified three companies with increasing short
interest that could lead to a short squeeze rally.
This once high-flying tech stock has been beaten down to
below $400 this month. Falling from a high of a little more
Apple (Nasdaq: AAPL)
has plunged nearly 50% in seven months.
Citing weakening demand,analysts have slashed their outlook
for the tech giant in recent months. Apple is largely a
victim of its own success, as investors hold the company to
ridiculously high standards of performance. Even with
record-breakingsales , analysts expect more -- and that
hurts the stock price.
Goldman Sachs (
removed Apple from its conviction buy list. To make matters
worse, Apple's new spaceship-style headquarters will cost
an estimated $2 billion more than was spent in 2012 on
research and development. Add the growing threat from
competitors such as
, and it's unclear whether Apple's stock can return to its
As you can imagine, short sellers have piled into Apple's
decline. Short interest has doubled since the same time
lastyear . Shares short stand at about 20 million, which
isn't much when compared with the 940 millionoutstanding
shares . However, as short interest increases, the chance
for a short squeeze grows. Buying on a breakout above $400
makes sense with a $450 12-month target.
Intechnical analysis , round numbers such as $400 or double
zeros are considered to be psychologicalresistance
A leader in the struggling solar industry,
First Solar (Nasdaq: FSLR)
posted dismal fourth-quarterearnings andguidance .
Short interest has fallen from more than 30 million shares
short in July 2012 to just above 18 million in March, but
it has increased since mid-February. There are only 87
millionshares outstanding with afloat of 60 million, making
18 million shares short a significant number. Even a tiny
amount of good news may launch a short-squeeze rally in
this alternative energy name.
Technically, shares have climbed since April 8. The stock
is above the 50- and 200-day simple moving averages.
I like First Solar as a breakout buy candidate above $40
with a 12-month target of $50.
Formally known as Research in Motion,
BlackBerry's (Nasdaq: BBRY)
short interest has been climbing steadily since April 2012,
tripling to more than 155 million shares. This equals 30%
of the outstanding shares. This increase comes despite the
latest numbers revealingrevenues at just under $2.7 billion
with aprofit of 22 cents a share.
Most interestingly for the bulls, the company'scash balance
remained steady at just under $3 billion, providing
BlackBerry a potential lifeline.
Of the three stocks, I like this company the most due to
its substantial number of shares short, which will likely
trigger a short squeeze on any additionalbullish news.
Technically, support in the $13 range makes this stock
aprime candidate for a breakout trade above $15. I wouldn't
be surprised to see this stock at $20 within the next 18
Risks to Consider:
It's important to remember that although a company may face
high odds for a short-squeeze rally, one isn't guaranteed to
occur. In addition, all three of these companies have substantial
headwinds to battle.
Action to Take -->
I like all three of these stocks as potential breakout buy
candidates. However, remember to wait for the upward momentum
before entering a position.