If a stock becomes highly shorted and oversold, a short squeeze may occur in which a bump up in stock price forces short sellers to close their positions, adding even more upward momentum to the stock price and causing even more short sellers to close their positions. The key is to determine when short selling hits an extreme.
Following this idea, we ran a screen on biotech stocks for those that are technically oversold [with RSI (14) below 40] and have also seen significant increases in shares shorted month-over-month.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.
We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.
Do you think these stocks are susceptible to a short squeeze? Use this list as a starting-off point for your own analysis.
List sorted by increase in shares shorted as a percent of share float.
1. Optimer Pharmaceuticals, Inc. (NASDAQ:OPTR): Biotechnology Industry. Market cap of $552.96M. RSI (14) at 39.33. Shares shorted have increased from 4.60M to 5.13M month-over-month, an increase representing 1.26% of the company's 42.04M share float. The stock is a short squeeze candidate, with a short float at 11.35% (equivalent to 6.08 days of average volume). The stock has performed poorly over the last month, losing 10.03%.
2. Targacept, Inc. (TRGT): Biotechnology Industry. Market cap of $595.63M. RSI (14) at 38.13. Shares shorted have increased from 1.07M to 1.26M month-over-month, an increase representing 0.84% of the company's 22.49M share float. This is a risky stock that is significantly more volatile than the overall market (beta = 3.09). The stock has gained 3.59% over the last year.
3. Corcept Therapeutics Inc. (NASDAQ:CORT): Biotechnology Industry. Market cap of $335.04M. RSI (14) at 36.84. Shares shorted have increased from 1.81M to 1.97M month-over-month, an increase representing 0.32% of the company's 50.44M share float. It's been a rough couple of days for the stock, losing 10.34% over the last week.
*Short data sourced from Yahoo! Finance, all other data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.