CHICAGO, Feb. 20, 2013 /PRNewswire/ -- Stocks in this week's article include: Essex Property Trust, Inc. (NYSE: ESS), Encore Capital Group, Inc. (NASDAQ: ECPG), Manchester United plc (NYSE: MANU), Eaton Vance Corp. (NYSE: EV) and Valassis Communications, Inc. (NYSE: VCI). Kevin Matras looks at the 'short ratio' as a market sentiment indicator and shows how to use it for finding winning stocks.
Screen of the Week written by Kevin Matras of Zacks Investment Research: This week's Screen looks at a market sentiment indicator called the short ratio to find new stock picks.
The short ratio is the number of shares sold short (short interest or bets that the stock will go lower in price) divided by the average daily volume. The higher the ratio, the longer it would take to buy back the 'sold' (borrowed) shares. And in theory, the more short positions there are to cover, the stronger the short covering rally would be.
Many people who use this indicator like to look for the number of "days to cover" to be higher than 8-10 days. It's generally believed that a short ratio of that size could prove difficult to cover and therefore trigger a strong rally on any hint of an upswing. (My personal preference is to take that into consideration, but also compare it to the industry's average ratio and the stock's own historical ratio.)
And while I wouldn't recommend using just the short ratio as the 'be all to end all' of screening items, I do think it can be a great tool for helping define great opportunities.
Short Ratio and Uptrends For stocks moving higher, try looking for historically high short ratios for stocks up 20% or more (new uptrend) or that have just rallied past an important moving average like the 50 or 200-day average. (Funds will often pile in at those points. So a large short ratio could propel the market significantly higher as huge buyers bid the market up while panicky shorts chase it even higher just to get out.)
The screen I'm currently running focuses in on those kinds of companies: stocks in solid uptrends with relatively large short ratios that could send the stocks soaring if the shorts are forced to buy those shares back. The parameters to this week's screen are:
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
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