(Written by Alexander Crawford, list compiled by Eben Esterhuizen, CFA. Short data sourced from Yahoo! Finance, all other data sourced from Finviz.)
Shares shorted is a very helpful tool that analysts use to gauge the market’s temperature on a stock – when a stock sees more shares shorted, it means that short sellers have become more pessimistic about the stock.
Short selling is a trading technique that allows investors to profit on a stock’s decline in price. The short seller borrows the stock today, immediately sells it, and agrees to buy it back and return the stock at a future date. This way, the short seller gets to keep a profit if the stock’s price declined.
When a stock sees a significant decrease in shares shorted, it is referred to as “short covering,” as in short sellers are covering their positions by closing them. It indicates an optimistic (or bullish) change in sentiment of the stock.
To demonstrate this, we ran a screen on technically oversold micro-cap stocks that have seen significant short covering month-over-month.
In case you don’t know what some of these terms mean, we define them below:
Technically oversold: RSI stands for Relative Strength Index, and it measures the speed and change of price movements. It is often used as a momentum indicator, with a reading that ranges from 0 to 100.
In general, RSI(14) above 70 signal the stocks are overbought (i.e. prices might soon decline), and RSI(14) below 30 signal the stocks are oversold (i.e. prices might soon rebound).
Micro-cap: This represents stocks with market capitalizations between $100 and $300 million, which is comparatively small. Market capitalization, commonly referred to as market cap, is the total market value of a company’s outstanding shares. It can be calculated by multiplying the number of shares by the current price of the shares.
Do you think these stocks will soon see a bounce back? Use this list as a starting point for your own analysis.
List sorted by decrease in shares shorted as a percent of share float.
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1. DepoMed Inc. (DEPO): Develops and commercializes pharmaceutical products based on its proprietary oral drug delivery technologies in the United States. RSI(14) at 38.04. Shares shorted have decreased from 7.25M to 5.67M over the last month, a decrease which represents about 3.41% of the company's float of 46.38M shares.
2. MedCath Corp. (MDTH): Engages in the ownership and operation of hospitals in partnership with physicians in the United States. RSI(14) at 13.65. Shares shorted have decreased from 1.16M to 655.78K over the last month, a decrease which represents about 3.27% of the company's float of 15.40M shares.
3. Camelot Information Systems Inc. (CIS): Provides enterprise application services and financial industry information technology (IT) services in the People's Republic of China. RSI(14) at 36.96. Shares shorted have decreased from 5.29M to 4.60M over the last month, a decrease which represents about 2.52% of the company's float of 27.43M shares.
4. Meru Networks, Inc. (MERU): Engages in the development and marketing of a virtualized wireless LAN solution. RSI(14) at 37.59. Shares shorted have decreased from 3.32M to 3.25M over the last month, a decrease which represents about 1.11% of the company's float of 6.32M shares.