Market Overview

Trading Idea: These 5 Stocks Are Ready To Squeeze Higher

Successful trading is often more about understanding the market mechanics of why certain stocks move the way they do as opposed to buying fundamentally undervalued securities and selling fundamentally overvalued securities. For some smaller names, one of the biggest drivers of volatility and price movement is the activity of short-sellers. As counter-intuitive as it may seem, when a stock has a high level of short interest it can be a bullish near-term signal - particularly during market rallies or when some good news comes out.

These stocks benefit not only from the normal activity of buyers, but also from the buying pressure created by short-sellers covering their positions. This dynamic can create some very powerful rallies. In order to try to identify some potential trading opportunities where short-sellers may be vulnerable to a squeeze, I ran a simple screen.

I scanned for stocks based on market capitalization, percentage of float short, insider buying, 20-Day High/Low, and price versus the 50-Day SMA. The parameters used were market capitalization between $300M - $2B, short float above 20%, very positive insider buying activity, stocks between 0-5% below a new 20-Day high, and stocks trading above the 50-Day SMA.

The logic behind these five variables was to look for small-cap stocks with insider buying and a strong near-term technical outlook which could benefit from short-covering. The scan returned five different stocks that fit the required criteria - Ebix (NASDAQ: EBIX), Fred's, Inc. (NASDAQ: FRED), Meredith Corporation (NYSE: MDP), Blue Nile (NASDAQ: NILE), and Sequenom (NASDAQ: SQNM). Below, the stocks are examined more closely.

Ebix - This is a small-cap company that is an international supplier of software and e-commerce solutions to the insurance industry. Ebix has a market cap of $821.56 million and had more than 32% of its float sold short as of December 15. The stock has been in a very strong uptrend since bottoming out along with the broader market in October. Over the last 3 months, EBIX shares have risen almost 50%, including better than 11% in the last month. Year-to-date, however, EBIX is still down 4.48%. Given the company's small size and the heavy short interest in the stock, not surprisingly, this name is quite volatile. EBIX currently trades at $22.55 and has traded between a low of $13.02 and a high of $30.35 in 2011. Another interesting thing about this stock is that it has been an awesome long-term performer. EBIX shares have risen 629% in the last 5 years and 2,608% in the last 10 years. This could be a name to ride higher at the beginning of 2012 if its current uptrend remains intact and short-sellers begin covering.

Fred's - This small-cap company operates 653 discount general stores and 313 full service pharmacies in 15 states, primarily in the Southeast. Its market cap at current levels is $543.31 million. Similar to EBIX, shares have been on a tear since bottoming at the beginning of October. Over the last 3 months, FRED is up 33.61%, including 17.55% in the last month. Some of the bullish activity is undoubtedly related to short-covering, and the name still had short interest of around 20% as of December 15. FRED is sitting at a new 52-week high of $14.65 and has gained 6.61% in 2011. In fact, the stock is close to breaking through multi-year resistance above $15. If this happens, it could set off a quick short squeeze.

Meredith Corp. - MDP is showing the same pattern as both EBIX and FRED. The stock bottomed in early October along with the broader market and has been rising at a torrid pace ever since. MDP has gained more than 41% in the last 3 months and nearly 20% in the last month alone. Nevertheless, more than 26% of its float was still sold short as of mid-December. Meredith has a market cap of $1.47 billion and the company is engaged in magazine publishing and related brand licensing, television broadcasting, integrated marketing, interactive media, and video production related operations. Year-to-date, the stock is down around 6% and is trading 5% below a new 52-week high.

Blue Nile - This company is an online retailer of diamonds and fine jewelry. Currently, NILE has a market cap of $548.89 million. The stock has been beaten down in 2011, falling around 29%, but has been in an uptrend recently. Over the last 3 months, NILE shares have risen almost 11%, including 17.5% over the last month. The stock's short interest, which is above 36%, could help propel it higher as short-sellers begin to cover as the position moves against them. On Thursday, NILE has gained 2.41% on above average volume and is hitting new 1 month highs. Keep an eye on this name in 2012.

Sequenom - This is a small-cap biotechnology company that focuses on diagnostic testing and genetics analysis. The company has developed a non-invasive test for Down syndrome in fetuses using a sample of the mother's blood. Small bio-tech stocks are notoriously volatile and SQNM is no different. Shares are down more than 43% in 2011 and SQNM is highly speculative. Over the last 3 months, the stock has lost around 17%, but is up better than 5% in the last month. With shares trading at $4.32, the name is well off of its 52-week high of $8.71. Short interest was at 23% as of December 15. Given that the stock is starting to show signs of positive momentum, these short-sellers could drive the SQNM higher going forward.

Posted-In: Long Ideas Short Ideas Small Cap Analysis Technicals Psychology Intraday Update Movers Trading Ideas General Best of Benzinga

 

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