Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
Schaeffer's Contrarian Trio
10/21/2013 9:00 am EST
A number of equities have seen significant spikes in short interest during the most recent reporting period; here we look at three outperformers, all of which could benefit from this increase in skepticism, says technician Terri Stridsberg, in Schaeffer Investment Research.
Dollar Tree (DLTR), has had a banner 2013, gaining 45.3% year-to-date, and tagging a new record high of $59.68. Nevertheless, short interest skyrocketed by close to 398% over the most recent reporting period, and now accounts for a healthy 6.7% of the equity's available float.
It would take more than seven days to cover these shorted shares, at the stock's average pace of trading—more than enough sideline cash to fuel a short-covering rally.
Meanwhile, data shows a 10-day put/call volume ratio of 1.46 for Dollar Tree, Inc., confirming puts bought to open have outstripped calls during the last two weeks.
This ratio ranks higher than 96% of similar readings taken within the past year, meaning traders have been picking up puts over calls at a near-annual-high clip. An unwinding of these bearish bets could help propel the shares even higher from their current perch.
HCA Holdings Inc. (HCA) has also been a standout on the charts this year, boasting a 2013 advance of nearly 55%—and besting the broader S&P 500 Index (SPX) by roughly 17 percentage points during the most recent three-month time frame—to trade at $46.67.
However, skeptics remain undaunted, as short interest surged by 30% over the course of the last two weeks. With a respectable 3.5% of the security's float now sold short—the equivalent of 9.5 million shares—an exodus by the bears could trigger a short-squeeze situation.
Also of note, Schaeffer's put/call open interest ratio for HCA sits at 1.61, indicating puts outnumber calls among options scheduled to expire in the next three months.
This ratio registers in the 94th percentile of its annual range, signaling near-term traders have rarely been more put-focused toward the stock during the past 52 weeks.
If these bearish traders capitulate to HCA's positive price action, the unwinding of these near-term puts could provide an options-related boost.
Not to be outdone, Diana Shipping (DSX) has trekked 67.5% higher so far this year, and sports a 52-week gain of more than 72% to wink at the $12.20 level. Even so, the equity saw a 28.2% rise in short interest during the second half of September, and a 35.1% surge during the past two reporting periods.
Since these pessimistic bets now make up 4.8% of the stock's available float, a wave of future short-covering activity could serve as a tailwind for DSX down the road.
Further evidence of the doubt surrounding Diana Shipping Inc. lies in the fact that only three analysts have deemed the equity worthy of a strong buy endorsement, compared to five holds and two strong sell recommendations.
Adding insult to injury, Thomson Reuters shows an average 12-month price target of $11.48 for the shipping firm, denoting a discount to the stock's current price.
In other words, a round of upgrades and/or price-target hikes could be on the horizon for the security, which could add more fuel to DSX's contrarian tank.
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