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:
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
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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