Stock momentum trends are very interesting to follow, not only because they might predict the direction a stock will move, but because they also might predict how certain investors will trade. This is important when it comes to short-sellers because it might precipitate something called a "short squeeze."
Shorting
Short-selling is an investment technique that involves borrowing money and selling shares today with the promise to buy and return the shares in the future, which allows an investor to make money when the value of a stock falls. But short-sellers also lose money when the share price rises.
Because short-selling requires borrowing, an individual or institution must meet several requirements (including background checks) to engage in short-selling. Thus, in general, short-sellers are more sophisticated than the average investor, and some view their trading decisions as predictive.
Momentum
As mentioned above, stock momentum to the upside might precipitate something called a "short squeeze." That is, if a stock is moderately or highly shorted, and it sees a move up in trading, it will force some short-sellers to close out their position, or "cover" it.
As short-sellers cover their positions by buying back the shares, they add to the upward momentum, which will cause more short-sellers to cover their position. In this way, upward momentum can set off a short squeeze.
Business section: Investing ideas
To illustrate these ideas, we began by searching for stocks with technical momentum to the upside. We screened for stocks exhibiting the "golden cross," in which their 50-day moving average has recently crossed above their 200-day moving average.
We then screened for stocks that have already begun to see short covering, with those seeing significant decreases in shares shorted month-over-month.
Do you think these stocks' momentum will cause more short covering?
List sorted by decrease in shares shorted as a percent of share float. (Click here to access free, interactive tools to analyze these ideas.)
1. Cabot Microelectronics: Engages in the development, manufacture, and sale of chemical mechanical planarization (CMP) consumables to the semiconductor industry. Market cap of $1.15B. SMA50 at $45.24 vs. SMA200 at $43.20 (current price at $50.53). Shares shorted have decreased from 3.05M to 2.49M month-over-month, a change representing 2.54% of the company's 22.05M share float.
2. Vulcan Materials
3. Dollar Thrifty Automotive: Rents and leases vehicles through company owned and franchised stores under Dollar and the Thrifty brand names primarily in the United States and Canada. Market cap of $2.14B. SMA50 at $69.22 vs. SMA200 at $68.87 (current price at $73.84). Shares shorted have decreased from 3.66M to 3.33M month-over-month, a change representing 1.84% of the company's 17.95M share float.
4. Lamar Advertising: Provides various outdoor advertising services. Market cap of $2.83B. SMA50 at $26.09 vs. SMA200 at $24.92 (current price at $30.07). Shares shorted have decreased from 7.01M to 6.36M month-over-month, a change representing 1.32% of the company's 49.13M share float.
5. Hollysys Automation Technologies
6. Armstrong World Industries
7. Oriental Financial
8. Louisiana-Pacific
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Alexander Crawford does not own any of the shares mentioned above. Short data sourced from Yahoo! Finance.
