8/27/2013

One of the best indicators to find stocks that can break out quickly is short interest as a percentage of Float. Short interest as a percentage of float is the number of shorted shares divided by the float (the float is the total number of shares publicly owned and available for trading). Basically stocks that have a high percentage of their shares being sold short are ripe for a “Short Squeeze.”

A “Short Squeeze” occurs when short sellers are forced to cover their shares when a stock moves against them abruptly. This causes sellers to panic, and if they are leveraged they can be forced to cover their shares. Either way it creates instant buying in a stock.

A lot of traders look at a high short interest as a percentage of float as rocket fuel, because they know these types of stocks have built in buyers due to all the short sellers that might have to cover on abrupt move.

Yet looking at just short interest as a percentage of float can be dangerous, because the so called “smart money” hedge funds are usually the ones who sell stocks short. And they will not sell a stock short unless they believe there is a major fundamental reason for why the stock will go down.

But by combing momentum with a high short interest as a percentage of float, you are testing the will of the short seller, and how much pain they can take being short the stock when it is going against them and they are losing money. If their losses become too big eventually they will throw in the towel and this will cause the stock to breakout in a big way.

Here is a list of the top 3 stocks with the highest short interest as a percentage of float and with the best momentum. These stocks have been outpacing the market, and causing pain to the investors shorting these stocks. So eventually, you could see a short squeeze and a big move up in these stocks.

1) ITT Educational Service Inc. (ESI), this stock has an amazing 57.6% of its float short, yet the stock is up more than 100% over the last 5 months.

2) Radioshack Corporation (RSH), Radioshack has almost 40% of its float short, yet the stock is up more than 30% this month alone, and it has just broken out of a huge channel formation as well.

3) Miller Energy Resources (MILL) Miller has 35% or more than a 1/3 of its float short and the stock is up more than 50% since April.