Financial Short-Squeeze Ideas for July

By Fred Fuld

Who would have thought that a short squeeze would hit the Treasury bond market?

Usually, a short squeeze takes place when a heavily shorted stock is quickly bought back in by the short-sellers, driving the price of the stock up sharply. But recently, more than a 1,000 investors, most of whom had shorted Treasury note futures, said they lost more than $600 million because Pacific Investment Management Co. created a short squeeze. Pimco increased its ownership of the Treasury note futures from 12% to 42% in just two weeks, driving the price way up and causing short-sellers to cover their positions at a loss. Pimco recently lost an appeal related to these claims in the U.S. Seventh Circuit Court of Appeals in Chicago.

In other short-squeeze news, in the first week of June, SunTrust Bank(STI Quote) skyrocketed 29% due to an upgrade by an analyst and a short squeeze.

There are, of course, various catalysts that could trigger a short squeeze, including releasing an earnings report significantly better than analysts' expectations. So with earnings season underway, and with all the volatility in the financials, we thought we'd look for some interesting short-squeeze possibilities in the financial sector.

In addition to its weekly short squeeze portfolio and article, Stockpickr has various resources available to investors seeking information about short squeezes. At Stockpickr's Answers forum over the past month, there have been more than 30 questions related to short squeezes. In Answers, Stockpickr members (sign up here) can ask and respond to each other's questions, and experts such as David Peltier and Scott Rothbort visit regularly to pitch in their two cents.

Now, onto this week's financial short-squeeze ideas. These stocks, set to report earnings soon, are heavily shorted compared with other financial stocks. Short-squeeze opportunities are measured with the short ratio, which reflects the number of days it would take the short-sellers to cover their positions based on recent average daily trading volume. For reference, Bank of America(BAC Quote) has a short ratio of 0.3, which means it'd take about a third of a day for short-sellers to conver their positions; Wells Fargo(WFC Quote) has a short ratio or 1.6; and Citigroup(C Quote) has a short ratio of 6.6.

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