When To Buy A Heavily-Shorted Stock

At EarningsBeats.com, we maintain a Short Squeeze ChartList (SSCL), which is updated once or twice per month.

We provide, in one ChartList, the most heavily shorted stocks in the market. We monitor this list for potential breakouts as such breakouts could trigger a tsunami of buying. But patience is definitely required with this group as it can take months sometimes for a stock to trigger a "short squeeze", which is the term frequently used when a wave of buying creates panic buying among those shorting a stock. Currently, Bed Bath & Beyond (BBBY) is the most heavily shorted stock at more than 45% of its float. Here's the chart:

Enter Bed Bath & Beyond, Inc. (BBBY):

As you can see, just because a stock is heavily shorted is no reason to randomly buy it. The downtrend has been severe and those on the long side just keep losing more and more money. But do you see the sudden surge in price on MASSIVE volume in August? Those are the moments we live for in terms of trying to ride a short squeeze. There MUST be heavy volume, or you have no "short squeeze", which requires panicked buying. Everything was sailing along nicely for those shorting BBBY from April through July. But in the matter of a few days, many who were shorting saw all their profits disappear and suddenly they were losing a TON of money. Short sellers face the prospect of unlimited prices to the upside, so as prices continue to surge, they're FORCED to cover (or buy back) their shorted shares. I'd be very careful, however, buying heavily shorted stocks on pullbacks. That's a dangerous game as you can see from BBBY's long, steady downtrends.

Happy Trading! Tom Bowley Chief Market Strategist EarningsBeats.com Better Timing. Better Trades.