Using Short Ratio at Market Bottom
The stocks featured in this week's screen are: Albany Molecular Research, Inc. (AMRI - Snapshot Report), Alliant Techsystems, Inc. (ATK - Snapshot Report), Quest Diagnostics, Inc. (DGX - Snapshot Report), Sun Healthcare Group, Inc. (SUNH - Snapshot Report), and Sybase, Inc. (SY - Snapshot Report).
The item is called the 'short ratio'.
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. This is sometimes referred to as the "days to cover" ratio because it tells approximately how many days it will take short-sellers to cover their positions if good news sends the price higher.
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 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.
For example; sometimes when I'm looking for stocks that have been in a lengthy consolidation, I'll look for those stocks with high short ratios.
Why?
Because consolidation ranges are basically areas of market indecision. Bets are being made by both bullish and bearish investors. So finding stocks that are going back and forth near their price highs or lows with a growing short ratio shows that ever-increasing bets are being made on prices going lower.
However, if the stock breaks out to the upside, properly positioned bulls will more than likely add to their winnings ... undecided traders will now be convinced to get long ... and shorts will have to scramble to cover their bearish bets. This can be an explosive situation.
This is actually quite effective when bottom fishing too.
When a stock is getting battered and pundits are wrangling over whether it's the bottom or not, you should pay close attention to the short ratio.
Of course, there has to be a reason for a stock to move higher. So an improving fundamental outlook is important.
But when lopsided market sentiment seems to be at its worst (reflected by investors' buying and selling), the short ratio can be just the thing to uncover extremes.
That's the kind of screen I'm running this week.
The parameters are:
- Current Price / 52 Week Low
(Stocks trading no more than 20% above their 52 week low.) -
Estimated One Year EPS Growth Rate (F1/F0) > 0
(There has to be a reason to move higher and a positive growth rate helps build that reason.) -
% Change in F1 Estimates over 12 weeks > 0
(This shows that the analysts are getting even more bullish on their projections.) - Zacks Rank
(No Zacks Sells or Strong Sells allowed.) -
Current short ratio > short ratio from 1 month ago
(An upside breakout could trigger a short covering rally.)
AMRI - Snapshot Report Albany Molecular Research, Inc.
ATK - Snapshot Report Alliant Techsystems, Inc.
DGX - Snapshot Report Quest Diagnostics, Inc.
SUNH - Snapshot Report Sun Healthcare Group, Inc.
SY - Snapshot Report Sybase, Inc.
Try using the short ratio in some of your current screens and see if it gives you a greater edge and keener insight into what's really happening with your stocks.
This item isn't available in all screeners (especially the historical values), but it is available in the Research Wizard.
And remember the key to successful screening is in discovering those screens that have produced profitable results in the past. And that's exactly what you get with the powerful Screening and Backtesting ability of Research Wizard.
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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.