3 Short-Squeeze Stocks for Earnings Season
NEW YORK (TheStreet) -- Europe's a mess, Chinese growth is slowing down faster than expected, the domestic recovery is in its infancy and we are about to enter a traditionally slow seasonal period for the market. It's no wonder investors are selling stocks. But there's a big difference between selling to lock in gains or to shed a loser and selling short.
Selling short means that an investor borrows stock to sell at today's price, with the intention of buying it back in the future at a lower price. The short investor is betting that the price of the stock in question will decline. However, if the price of the stock should go up instead of down, at some point that investor will be forced to buy back his stock to limit his loss.
Naturally, the more people are forced to cover their positions on the way up, the more the buying pressure will propel the stock higher. This action is what is commonly referred to as a "short squeeze."
Anticipating a short squeeze can be a very profitable way to play the market, and there is no better time to employ this strategy than during earnings season. Earnings provide a catalyst for action and if the short sellers are proven wrong by a stronger-than-expected quarter, they will start to aggressively cover their positions, thereby triggering the aforementioned squeeze. We have seen such activity play out routinely in stocks such as Lululemon
Admittedly, stocks are often shorted for good reason -- management issues, accounting irregularities, hyper-valuations. Nevertheless, if you can identify a candidate that defies the skeptics, the surge to new heights can prove very, very rewarding. Just look at the charts of the three examples cited above.