This week's Screen looks at a market sentiment indicator called
the 'Short Ratio' to find new stock picks.
The short ratio is the number of shares sold short (short interest
or bets that the stock will go lower in price) divided by the
average daily volume. This is also sometimes referred to as the
'days to cover' ratio because it tells approximately how many days
it will take short-sellers to cover their positions if good news
sends the price higher.
The higher the ratio, the longer it would take to buy back the
'sold' (borrowed) shares. And in theory, the more short positions
there are to cover, the stronger the short covering rally would be.
Many people who use this indicator like to look for the number of
'days to cover' to be higher than 8-10 days. It's generally
believed that a short ratio of that size could prove difficult to
cover and therefore trigger a strong rally on any hint of an
upswing. (My personal preference is to take that into
consideration, but also compare it to the industry's average ratio
and the stock's own historical ratio.)
And while I wouldn't recommend using just the short ratio as the
'be all and end all' of screening items, I do think it can be a
great tool for helping define great opportunities.
For example: sometimes when I'm looking for stocks that have been
in a lengthy consolidation, I'll look for those stocks with high
Because consolidation ranges are basically areas of market
indecision. Bets are being made by both bullish and bearish
investors. So finding stocks that are going back and forth near
their price highs, or recent lows, with a growing short ratio shows
that ever-increasing bets are being made on prices going lower.
However, if the stock breaks out to the upside for example,
properly positioned bulls will more than likely add to their
winnings ... undecided traders will now be convinced to get long
... and shorts will have to scramble to cover their bearish bets.
This can be an explosive situation.
This can be used quite effectively for bottom fishing too.
When a stock is getting battered and pundits are wrangling over
whether it's the bottom or not, you should pay close attention to
the short ratio.
Of course, there has to be a reason for a stock to move higher. So
seeing an improving fundamental outlook is important.
But when lopsided market sentiment seems to be at its worst
(reflected in investors' buying and selling), the short ratio can
be just the thing to uncover extremes.
For this screen, I'm looking for stocks that have been beaten down
more than the market over the last quarter, but that have recently
popped back up more than the market over the last week, amid a high
Relative % Price Change 12 weeks less than 0
(Stocks that have underperformed the market over the last 12
weeks. And since the market was down in that period, these stocks
were down more.)
Relative % Price Change 1 week greater than 0
(Stocks that have outperformed the market over the last week. And
since the market was up in that period, these stocks are up
Projected One Year Growth Rate greater than X Industry
(Companies with growth rates better than their industry.)
Short Ratio greater than 10
(Greater than 10 days to cover.)
Current Short Ratio greater than Short Ratio 1 Month
(In other words, the short ratio has increased over the last
Current Price greater than or equal to $5
Avg. Daily Volume greater than or equal to
Here are 5 of the companies that made the list this week:
Alnylam Pharmaceuticals, Inc.
--16.94 days to cover
Astoria Financial Corp.
--14.59 days to cover
International Bancshares Corp.
--19.21 days to cover
United Stationers Inc.
--17.93 days to cover
CVB Financial Corp.
--13.95 days to cover
All of these stocks were beaten down more than the market in the
last few months, but have bounced back more in the last week, and
they still have large short ratios.
Try using the short ratio in some of your current screens and see
if it doesn't give you a greater edge and keener insight into
what's really happening in your stocks.
This item isn't available in all screeners (especially the
historical values and industry values), but it is available in the
Remember, the key to successful screening is in discovering those
screens that have produced profitable results in the past. That's
exactly what you get with the powerful Screening and Backtesting
ability of Research Wizard.
Click here to sign up for a free trial to the
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Disclosure: Officers, directors and/or employees of Zacks
Investment Research may own or have sold short securities and/or
hold long and/or short positions in options that are mentioned in
this material. An affiliated investment advisory firm may own or
have sold short securities and/or hold long and/or short positions
in options that are mentioned in this material.
Disclosure: Performance information for Zacks' portfolios and
strategies are available at:
ASTORIA FINL CP (AF): Free Stock Analysis
ALNYLAM PHARMA (ALNY): Free Stock Analysis
CVB FINL (CVBF): Free Stock Analysis Report
(IBOC): ETF Research Reports
UTD STATIONERS (USTR): Free Stock Analysis
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