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Don’t Squeeze the Charmin

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Beware of stocks getting an artificial bounce from a ‘short squeeze.’ Instead, Jeff Macke explains how to use the squeeze to get out of bad stocks while you still can.

From many of the homebuilders to left-for-dead printing company Lexmark , investors don’t have to look far to find a short squeeze candidate, Jeff said. But it can be a treacherous way to play the market, as the pop all too quickly will turn back into a drop.

Short squeezes can often be identified when a little piece of good news sends a stock screaming higher. Karen Finerman pointed out IHOP , a winner in a space that’s otherwise been annihilated. With a float that’s 33% short interest, Karen said IHOP is a perfect example of how to use a bounce to make a “graceful exit."

Pete Najarian looked at Crocs , a stock where almost 16 million of 70 million shares outstanding are short. Buy CROX in the hope of getting an upside squeeze, he said, but don’t always look for quick gains in heavily shorted stocks, he warned. Sometimes the shorts are right.

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Trader disclosure: On Jan 29, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (DIS), (YHOO), (EMC): Najarian Owns (BIIB), (C), (CSCO), (ETFC), (MS), (MSFT), (MCD), (XLF); Najarian Owns (WEN) Calls, (AAPL) Calls, (YHOO) Calls, (EBAY) Calls; Finerman Owns (GS); Finerman's Firm Owns (TSO), (VLO), (WMT), (YHOO), (SUN); Finerman's Firm Is Short (MDY), (IYR), (IJR), (SPY), (CLWR), Finerman's Firm Is Short (LEH) And Owns (LEH) Puts