Here’s a list of 12 stocks priced above $10 and trading over 200k shares per day. All of them are heavily shorted – more than 20% of their float is short at this point of time.
Stocks with high short interest are likely to significantly outperform in the initial stages of a market recovery. High short interest could be a powerful short-term catalyst. When prices in a heavily shorted name start rising, short-sellers have a few options:
1) Cover for a small loss. In this case, they become buyers.
2) Sit, do nothing and pray that they are not squeezed out of their position.
3) They are forced to cover their shorts as they become reluctant buyers due to margin calls.
4) Hedge long-term short stock positions with short-term calls.
5) Add to their short position or average up – this could be very dangerous and lead to a major short squeeze down the road.
The most powerful short-squeezes tend to happen at the beginning and at the end of a major market uptrend because short-sellers don’t believe that a short-squeeze could happen at those levels. At a beginning of a new major trend, they are too complacent due to a recent period of making a lot of money on the short side or watching other people make money on the short side. They under-react to new developments in supply/demand dynamics, which is a great recipe for a short-squeeze. At the end of a major uptrend, many of the most heavily shorted stocks have gone up a lot and most short sellers don’t think that they could go any higher. In financial markets, the obvious rarely happens, the unexpected constantly occurs.
High short interest doesn’t guarantee that a stock will squeeze higher. It is just potential energy. When combined with momentum, it could lead to higher prices.