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Guest Blogger: Jeff Mishlove On "The Short Squeeze"

Hey folks. We have a guest blogger today--Jeff Mishlove. You may have seen him on the "How To Win" program on the contest, giving his picks, which have turned up some good ones (Jo-Ann Stores for eample). I asked Jeff to write down a few thoughts and he came up with what follows. He talks about his strategy--the "short squeeze" and how it works. Pretty good reading if you ask me.

Here's Jeff:

The “short squeeze” strategy is not the latest technique for getting rid of an unpleasant date. It’s actually a relatively little-known approach for identifying stock market thrusts. I’ve had the opportunity to appear on CNBC’s “How To Win” for the past three weeks – with another appearance scheduled on Friday, March 30. On each occasion, I’ve made a few stock predictions. And, some of them have been strong, very strong – with explosive single-day moves.

In particular, Jo-Ann Stores gained 12.369% on March 13 – a day in which the market experienced its second largest drop of the year. Another hit was Stein Mart , up 9.419% on March 21. Another hit that I had emailed in advance to 'How To Win” was Gamestop Corp that gained 11.405% on March 27. So, the producers of “How To Win” have decided to keep inviting me back to identify potentially strong growth stocks.

The obscure “short squeeze” strategy that I used has been so successful that other “HowTo Win" guests have begun integrating it into their own stock picks. Here’s how I do it:

Short-sellers are speculators who believe that the price of a stock is about to drop. This can occur for many reasons, but often it is simply because the stock is making new highs that seem unsustainable. They take a short position in the stock. Technically, this means that they borrow somebody else’s stock and sell it. They get to keep the proceeds from the sale, but they are obliged to return the stock that they borrowed. Their intention is to buy it back later at a lower price.

The same principle of normal investing applies to short-selling, i.e., “buy low, sell high.” But, the timing is reversed. Just as traders will close a long position when a trade moves against them, thus contributing to driving prices even lower – short sellers do the same.

When prices rise unexpectedly, they close their short positions by buying – and this pushes prices even higher. In fact, short-sellers were responsible for some of the astronomically dramatic price increases in internet stocks during the late 1990s and 2000 – such as Amazon .

Various financial websites collect information regarding short sellers. Some of the available information includes valuable statistics like the percentage of the stock float that is held by short-sellers. (Sometimes this is more than 25%.)

It is especially interesting to see the number of days that it would take short-sellers to close their positions, given the average volume of the stock. (Sometimes, this can actually take weeks.) When these numbers are very high, the prospect of good news will figuratively cause short sellers to lose their lunch.

Interestingly, the “short squeeze” phenomenon can snowball. This especially occurs as a stock is breaking to new highs – as was the case with Amazon. Because, in addition to the short-sellers trying to close their disastrous positions, trend followers and momentum players are also buying in greater numbers.

The advantage of the short squeeze strategy is that it tends to produce large movements. I have been able to specify the precise days on which to expect such movements by combining the strategy with a close look at the earnings calendar. Sometimes, of course, the movements are in the wrong directions. This occurred with my prediction for Scholastic Corporation that dropped significantly last week, as shown below:

Symbol
Price
 
Change
%Change
SCHL
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In this instance, SCHL (publisher of the Harry Potter books) reported both weak earnings and a reduced outlook for 2007. One of the best ways to avoid such negative surprises is to study the company’s history to see if their earnings announcements are either consistently above or consistently below analysts’ expectations – or, conversely, inconsistent in this regard. But, whether up or down, in real-life trading, the knowledge that a stock has the potential for a large movement in either direction can be very profitable information.

Jeffrey Mishlove, PhD, is the creator of www.forecastingsystems.com. He is a registered commodity trading advisor and is also author of several books on consciousness and intuition. He is former host of the national public television series, Thinking Allowed.

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Symbol
Price
 
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%Change
AMZN
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GME
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SCHL
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SMRT
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