Predictable Suspects: 5 ETF Short-Squeeze Candidates (EWZ, EWP, UNG)
A stock or ETF's short interest and short ratio can be instructive on multiple fronts. Obviously, this data can lead a trader to valid bearish plays using the theory that the more folks that are paying attention to rising short interest, the more followers there are that apt to join the party, even if they're late.
Or short interest data can be helpful in terms of making contrarian bets. After all, the shorts will eventually cover, whether they are doing so willingly or unwillingly. The bigger an ETF's short interest, the more viable the fund is as a short-squeeze candidate. Plus, it must not be forgotten that the longer the days to cover, the more amplified the short-squeeze effect could be.
With that in mind, we went hunting for highly liquid ETFs (at least 250,000 shares in average daily volume) that have the look of potential short-squeeze candidates. The list turned up some not-so-surprising candidates.
iShares MSCI Spain Index Fund (NYSE: EWP) It's fair to say the results of the Greek and French elections over the weekend were priced into European and U.S. equities because EWP is trading higher by almost 3% today on volume that is already more than double the daily average.
We've been bashing EWP and a yield that was in the double-digits heading into today for a while and with good reason. Finviz data indicate almost 65% of EWP's 5.8 million shares outstanding have been sold short. In other words, it can be said that Monday's bullish action in EWP is largely the product of short-covering, not traders and investors establishing new long positions in EWP.
iShares MSCI Italy Index Fund (NYSE: EWI) See above. EWI, another Euro Zone ETF abomination/yield trap that we've not had kind words for recently, is higher by 3% as of this writing. As is the case with EWP, the worst of the Euro Zone political news may already been baked into EWI. Short-covering? Probably. Nearly 34% of EWI's 6.6 million shares outstanding are sold short.
United States Natural Gas Fund (NYSE: UNG) UNG is a good news/bad news story and has been for all of its five-plus years of existence. The good new is UNG does exactly what it's supposed to do and that is efficiently track natural gas futures. The bad news, until recently, natural gas futures had been in a seemingly never-ending tailspin for almost four years.
Making a bullish call on natural gas is a bold thing to do at the moment, but UNG has shown some signs of life recently and the short-squeeze potential with this ETF is nothing short of alluring. More than 57% of UNG's 435.4 million shares outstanding are sold short. Any bullishness for natural gas futures and/or news of lower production could boost UNG, forcing a wave of short-covering.
Consumer Discretionary Select Sector SPDR (NYSE: XLY) The Consumer Discretionary Select Sector SPDR is an interesting case because only in the past week have the shorts really started to see results. XLY is up more than 15% year-to-date, but has lost 2.1% in the week.
Should real estate and employment data weaken, XLY's top-10 holdings such as Amazon (Nasdaq: AMZN), Home Depot (NYSE: HD), Ford (NYSE: F) and Nike (NYSE: NKE) could be crimped. If that happens, XLY could easily violate support around $44.50 and in that case, it would be best to join the shorts or put buyers rather than trying to catch a short squeeze. Translation: XLY probably needs to endure more near-term pain before it becomes a credible squeeze candidate.
iShares MSCI Brazil Index Fund (NYES: EWZ) If we're going to be technical about things, EWZ's short interest of 18.1% of 143 million shares outstanding isn't considered high. Short interests of 20% and above are "high." However, speaking of 20%, that's the decline necessary for a security or index to be considered in a bear market. Rounding EWZ's price at this writing up to $59 and it's highest closing price this year down to $70, we see that EWZ has lost almost 17% from its February peak.
Given how volatile EWZ, losing 3% in a couple of days, in turn forcing the ETF into bear territory, is not out of the realm of possibility. Should that happen, the short interest here will very likely increase. Down the road, should Brazil ETFs bounce back, the short covering with EWZ would likely be intense. For now, play the downtrend with the ProShares UltraShort Brazil (NYSE: BZQ) and wait for EWZ's short interest to rise some more before taking nibbles from the long side.
For other short opportunities with ETFs, please click HERE.
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