By Wayne Duggan
Short squeezes have dominated Wall Street headlines in 2021, but short squeezes can be extremely difficult to identify and time, even for professional traders. It’s nearly impossible to predict with certainty which stock may be the next to get squeezed to the moon, but there are certain traits that traders can look for to identify short squeeze candidates with huge upside potential.
High Short Interest and Low Float
The first thing to understand about a short squeeze is that it is entirely a market structure dynamic. In other words, short squeezes aren’t necessarily triggered by earnings beats, buyout rumors or new partnership announcements. While those headlines could all potentially be bullish catalysts for a stock, a short squeeze is based specifically on a temporary imbalance of supply and demand.
The first ingredient in a short squeeze is a stock with a large short interest. A short squeeze happens when a large number of short sellers are forced out of their positions all at once. Without short sellers, there will be no short squeeze.
Short percent of float is potentially the best measure to use to identify short squeeze candidates. A stock’s float is its number of free-trading shares not held by company insiders or institutional investors. If a high percentage of those shares are held by short sellers, the stock has major short squeeze potential.
In addition, stocks with low floats tend to be more volatile in general. Fewer shares trading in the market means only a modest jump in volume could trigger a big move in stock price.
Look for Short Seller Losses
Another thing to look for in a potential short squeeze stock is how well the stock has performed in recent weeks and months. Stocks that have performed poorly may not be good short squeeze candidates because most of their short sellers are likely sitting on cushions of profit. To force short sellers out of their positions, they typically need to experience heavy losses that either pressure them to voluntarily close out their position out of fear or force them out via margin calls.
Another factor to look for is rising borrow fees. Rising borrow fees are a good indication that the supply of shares available to borrow is dwindling, a phenomenon that could temporarily create a supply-demand imbalance that works against short sellers. If there are no shares to borrow, there can be no short selling to keep a stock down.
3 Short Squeeze Candidates Right Now
It’s extremely difficult to predict short squeezes, but here are 3 short squeeze candidates that have all the ingredients necessary for extreme moves higher:
MicroStrategy (MSTR) shares are up 52% in the past 3 months, and 23.5% of its 7.78 million-share float is currently held in short positions.
World Acceptance (WRLD) shares have gained 20% in the past 3 months, and 27.6% of its 2.91 million-share float is being utilized by short sellers.
Beam Global (BEAM) stock is up 13% in the past 3 months and 35.9% of its 7.53 million-share float is currently held by short sellers.
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