Squeezing the Shorts: Uptrending Stocks

Not a Stockpickr member? Join the community today -- for free.

By Jonas Elmerraji

BALTIMORE (TheStreet) -- Sometimes there's little rhyme or reason to the way Wall Street operates. That's because in the stock market, trading activity sets prices, not logic. When astute investors grab for chances to profit from that disconnect, some pretty exciting profit opportunities can ensue. That's why this week, we're looking at uptrending stocks for short-squeeze potential.

In 2009, the market has certainly turned the tables on the massive selloff that took place just one year ago. In the trailing 10 months, the Dow Jones has rallied 13.8%, yet despite the upward momentum we're seeing from a technical perspective, short-sellers haven't let up on a select few stocks as they've gained in price.

Those stocks present a very interesting short-squeeze opportunity right now as the market -- and the majority of stocks along with it -- continues to climb.

A short squeeze is the buying frenzy that ensues when a heavily shorted company starts to look attractive again to investors. As more and more of the short investors buy shares to cover their positions, share prices skyrocket. Almost anything can trigger a short squeeze, including trumping earnings expectations, winning a lawsuit, unveiling a new product and even announcing a management change.

One of the best indicators of just how high a short-squeezed stock could go is the short interest ratio, which divides shares short by average daily trading volume in order to get a ballpark estimate of the number of days it would take for short-sellers to cover their positions. The higher the short ratio, the higher the potential profits when the shorts get squeezed.