Contrary Trio to Bet Against Shorts

10/04/2013 9:00 am EST



These outperformers have seen a significant spike in short interest; in light of their technical prowess, they could end up benefiting from this increase in skepticism, making them fodder for potential bullish trades, suggests Terri Stridsberg of Schaeffer Investment Research.

Southwest Airlines (LUV) has been an outperformer on the charts, gaining nearly 43% year-to-date, and about 62.5% on a year-over-year basis.

What's more, the stock tagged a new multi-year high of $14.83 yesterday. Meanwhile, the equity's late August/early September pullback was contained by its 40-week moving average, which has acted primarily as a floor since late May.

However, there is still plenty of skepticism levied against the passenger airline. Short interest soared by more than 94% during the past two weeks, and now represents over four days' worth of pent-up buying pressure, at LUV's average pace of trading.

Should the shares continue to trek higher, they could benefit from a wave of short-covering activity down the road.

Elsewhere, the brokerage bunch is divided toward Southwest Airlines Co., as the security maintains six strong buy endorsements, compared to four holds, and two sell or worse suggestions.

Additionally, the stock's average 12-month price target of $15.46 reflects expected upside of just 6% to LUV's current perch at $14.59.

This leaves plenty of room for a round of upgrades and/or price-target hikes, which could end up serving as tailwinds for the airline concern.

Activision Blizzard (ATVI) has enjoyed a banner 2013, boasting a year-to-date advance of more than 57% to trade at $16.70.

Furthermore, the shares have outperformed the broader S&P 500 Index (SPX) by roughly 11 percentage points during the past three months. Also, a look at the charts reveals that the $16.60-$16.80 area has emerged as an area of support in recent weeks.

Nevertheless, the stock continues to be pummeled by pessimists. During the latest reporting period, ATVI saw a 28.7% spike in short interest, bringing the number of shares sold short to almost 11 million.

This ample amount of available sideline cash could fuel a short-squeeze scenario, should the equity continue along its upward trajectory.

Meanwhile, data from the International Securities Exchange, Chicago Board Options Exchange, and NASDAQ OMX PHLX shows a 10-day put/call volume ratio of 1.83 for Activision Blizzard, confirming puts bought to open have nearly doubled calls during the past two weeks.

In fact, this ratio ranks higher than 95% of similar readings taken over the past year, signaling speculators have been snapping up puts over calls at a near-annual-high pace. An unwinding of these bearish positions could add more fuel to ATVI's tank.

Michael Kors Holdings Ltd. (KORS) has also been a solid performer on the technical front, climbing more than 48% so far this year—and outshining the SPX by about 15 percentage points over the most recent three month time frame—to hover at $75.76.

The security also reached a fresh record peak of $78.62 on September 19, and the subsequent pullback was cushioned by its 40-day moving average.

Even so, the clothing designer remains surrounded by naysayers. KORS saw a 24.5% jump in short interest over the past couple of weeks, and now these pessimistic positions account for a healthy 4.3% of the stock's available float.

With north of 6.4 million shares currently sold short, the security could be poised for further gains, should this group of skeptics hit the exits.

Also, Schaeffer's put/call open interest ratio (SOIR) for Michael Kors checks in at 1.02, conveying puts slightly outweigh calls among options expiring in the next three months.

This ratio registers in the 77th annual percentile, implying near-term traders are more put heavy toward the equity than usual right now.

This host of put positions—particularly at the underfoot October 72.50 and 75 strikes, which collectively hold open interest of 3,054 contracts—could end up translating into options-related support in the short term.

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