A Strategy for Buying Short Squeeze Stocks can be a a profitable area of opportunity for investors and traders alike. And since I recently got a question about a strategy for trading short squeeze stock ideas I wanted to write a quick blog post about it.
In this short blog post I’ll share some proven strategies of buying short squeeze stocks. You’ll learn what to look for in the perfect short squeeze.
I’ll also share one of my favourite short squeeze stock screens to help you find profitable short squeeze trading opportunities.
Why Is it a Good Strategy To Buy Short Squeeze Stocks?
Buying short squeeze stocks is often a good strategy during market rallies. This is because if a stock has 10, 20 or 30% of shares sold short, then you know a large percentage of shares in the float are being held up by short sellers. This reduce the available supply for would-be buyers. Since there is less supply it can be more reactive to demand.
So what does a short squeeze look like in practice?
Well to dig deeper: When shorts are getting squeezed it means that the reduced public float is being bid up by sellers. Additionally, to cash out of a short position you have to buy back the shares you were selling short. This means that short squeezes can defy logic and oversold conditions because shorts who have been squeezed will eventually capitulate and re-buy their stock (which further pushes up demand for the stock on an already reduced float).
Since short sellers can get squeezed by a bear market rally or strong change of trend it can be a profitable trading strategy to look for short squeezes. Even if you are a long term investor, being aware of the percentage of float sold short can help you find fast-moving profit opportunities.
So what should you look for in the actual strategy for buying short squeeze stocks?
List of Strategy Tips For Buying Short Squeeze Stocks:
Buying short squeeze stocks is a bit opportunistic, so it’s difficult to make hard and fast rules about exactly what to look for. But here are some things I always keep in mind…
- High Short %: This one goes without saying. But your short squeeze strategy should focus on stocks that have over 15% of the public float sold short. This makes a meaningful reduction on the available supply.
- Fundamental Tailwinds: Short sellers are often right when they sniff out news about companies with fraudulent accounting or faulty products. And while it’s hard to protect yourself from devious management you can at least do a little fundamental due diligence. Check the stock isn’t wildly overvalued and put in some work to understand the growth narrative. If you’re looking for a quick trade this isn’t as important as if you’re a longer-term investor but either way it’s important to be aware of the fundamental backdrop.
- Price Momentum and Trend: Picking exact tops and bottoms is always difficult. Look for stocks that are already trending upwards or are at least trading above their moving averages. There is plenty of opportunity to apply your short squeeze strategy to buying stocks, you don’t have to be the first one to rush in and prove the shorts wrong. Wait until price momentum is on your side (more on this in the video below).
- Insider and Institutional Ownership: If a stock has strong institutional or insider ownership (especially when combined with fundamental headwinds) there is a good chance that your short squeeze could be a long term one. Institutions with large positions will support the stock price at key moments. This all ties up extra supply and further puts short sellers in the vice. Look for stocks with over 30% institutional ownership to reap this benefit.
- Small Public Float: I don’t have any hard and fast rules about the exact number of shares you want to see in the public float, but the fewer the better. If there are less shares in the float then the pool of supply is smaller, which is great for squeezing stocks higher. When stocks have a low float, high percentage of the float sold short and strong institutional ownership you can usually bet that short sellers are about to get squeezed by strategic dip-buyers.
- News Catalysts: Since short squeezing is opportunistic, often-times there will be catalysts that really cause the short sellers to feel squeezed. For example a company could have a drug approved by the FDA, a lawsuit might have a favourable outcome or the SEC might give a company the all clear after a long investigation. It’s hard to say what the exact catalyst will be (since it’s always different) but if you incorporate a fundamental news catalyst into your short selling strategy you can really improve your odds of short squeeze success. The FinViz signal stock screen is an easy way to do this.
- Strong Market Breadth: Short squeezes don’t exist in a vacuum. So it shouldn’t surprise you that the most potent short squeezes come on days when the broad market indices are going up. If every stock is going green short sellers tend to lose conviction and start to buy back their shares (further boosting the price higher). By strategically short squeezing on days when the S&P-500 is strong you can get the maximum outcome with the least risk.
As you can see there are a lot of different factors that go into a strategy for buying short squeeze stocks. While all of these factors help, you don’t necessarily need all of them to line up. Just be careful to manage your risks appropriately. While trading short squeezes can be fun and profitable, there is also usually a reason the stock has such a large short position so be ready to cut your losses quickly if the squeeze goes against you.
Now if you’re still a little confused, here’s a video on how you can create a stock screen to help you find ideas of short squeeze stocks to buy.
Example Strategy for Buying Short Squeeze Stocks: [VIDEO]
And by The Way: If you’re curious to learn a little bit more about how I’ve refined my stock trading methodology over the years to take advantage of short squeezes and many other special situations then just sign up for the email below. You’ll get my free ebook and other resources you can use to improve your stock trading, sound good?