Wouldn’t it be great if you knew how to find short squeeze stocks that are about to go parabolic? Well, even if there is no sure way to find the next GameStop, there are certain stock metrics, ratios, and additional information you can use to identify stocks that could experience a short squeeze.
In this guide, we will go over some of the most important metrics and ratios to look for when identifying short squeeze stocks.
Can you find short squeeze stocks?
While it isn’t a complete certainty that you can find short squeeze stocks before the squeeze actually happens, there are certain stock metrics and financial ratios that you can use to look for short squeeze stocks.
What to look for when looking for short squeeze stocks?
- High short interest
- Low float
- Buybacks
- Trading volume
- Earnings releases or positive news coming up
- Look for one day big jumps
- Forced share recall
- Insider activity
High short interest
The first thing to look at is the short interest ratio of a stock. A short squeeze is impossible if the short interest is low, therefore you need to look at stocks with high short interest. If the short interest is above 15% to 20% of the float then there is a good possibility for a short squeeze.
Obviously, it depends on other factors such as the average traded volume. If the trading volume is low, the possibility of a short squeeze is higher.
Low float
The float represents the number of shares that can actually be traded, and the lower the float, the higher the possibility of a short squeeze. Typically, stocks with high insider ownership will tend to have a low float and are more likely to have a short squeeze. This is because insiders are closely monitoring the stock price, and might start buying the stock, creating, even more, buying pressure as short sellers have to cover.
Buybacks
A company that is conducting a buyback program is much more likely to create a short squeeze. It is always dependent on the amount allocated for the buyback, but as the company acquires shares it adds more buying pressure and could force the stock price higher.
Trading volume
Trading volume is directly related to short squeezes, and usually, stocks that have an average low trading volume tend to be the perfect opportunities for a short squeeze. One of the factors researchers have found is that a large increase in the traded volume of a stock can create a short squeeze.
While this increase is usually created by positive news, it is important that the trading is relatively low, so that when buyers step in, it creates a positive feedback loop. Short sellers will also try to short the stock as it goes higher, which may seem like it could slow down the short squeeze but it does not.
As more short sellers shorting the stock decreases the availability of shares to borrow while also increasing the cost to borrow.
Earnings releases or positive news coming up
Most short squeezes are triggered by positive news or some type of tailwind that pushes investors to buy the stock and increase the traded volume. While it can be difficult to exactly predict when a certain company will have positive media coverage, it is a good idea to look at earnings releases.
A better-than-expected earnings result can trigger a short squeeze. So try to look for stocks that are about to release earnings.
Look for one day big jumps
The research shows that a large jump in the share price in a single day increases the demand for investors looking to short the stock, and this obviously increases the cost to borrow the shares.
Therefore even if you do not pick the stock before the short squeeze starts, you can monitor some of the stocks that have this type of profile and wait for the big day jump, to buy and push the short squeeze.
Forced share recall
There is also another factor that can create a short squeeze, and although most investors are unaware of it, some of the largest short squeezes in history had a forced share recall. A forced share recall happens when the lender of the securities decides to recall them, and forces short sellers who borrowed them to cover their positions.
An organized share recall by most investors could trigger a short squeeze in stocks with high short interest, because it forces short sellers to cover pretty much at the same time, creating an unraveled buying pressure on the stock.
Insider activity
Finally, something to look closely at is insider activity and ownership. A stock that has lots of insiders investing in it, is a lot more likely to experience a short squeeze. As insiders are closely looking at the share price, and even adding more shares. Pay close attention to insider activity in stock, and whether or not insiders are buying despite the short-selling pressure.
How do you find out which stocks are being shorted?
The best way to find stocks that are being heavily shorted is to use a stock screener and filter stocks with short interest above 15%. One of the best stock screeners available is Stock Rover, which has plenty of functionalities beyond this, and you can try it for free here.
Where can I find a list of the most shorted stocks?
Using a stock screener you can which stocks have the highest short interest, and those will be by far the most shorted stocks. Here are the steps you need to take in order to find short squeeze stocks:
How to use a stock screener to find short squeeze stocks
Here are a few steps you can take to find short squeeze stocks using a stock screener:
Step 1 - Filter by high short interest
Using a stock screener you can start by filtering stocks based on the short interest. Find the ones that have the highest short interest.
Step 2 - Analyze the trading volume
Once you have a list of stocks with high short interest, it is now time to look at the trading volume. Analyze historically, both daily, weekly, and monthly trading volume to see if you can find any pattern. An increase in trading volume can usually mean that the stock could be ready for a short squeeze.
Step 3 - Check the float of the stock
You should also check the float of the stock to compare it with the trading volume and determine what percentage of the float is actually being traded on a daily, and weekly basis.
Step 4 - Create a watchlist with the most promising
Finally, you want to create a watchlist with all of the stocks that meet the requirements so you can research them, and monitor the price changes.
How do you know if a stock has a short squeeze?
If you are looking to find a stock that is about to experience a short squeeze you need to monitor a few of the most shorted stocks in the market at any given time. When you see a large jump and increase in volume you will notice that the short squeeze is starting.
You can also monitor just the trading volume, on stocks with high short interest and jump in when you see those movements. Additionally, you can take another approach which is identifying the stocks beforehand, and buying them while you wait for the short squeeze to occur.
Conclusion
Short squeezes can be immensely profitable and are one of the best opportunities to go long a stock. While it can be difficult to know which stocks to buy before the short squeeze actually happens, the best approach is to research and filter stocks beforehand using a stock screener and then monitor them. Once there is a spike in the traded volume and the stock price, that is the best sign that a short squeeze could be about to happen.