BALTIMORE (Stockpickr) -- Normally, investors equate a rally in commodities with struggling stock performance, but that's not necessarily true.
While rising commodity prices do tend to correlate with flat or downward movement in the stock market, the exception comes in resource stocks. Not surprisingly, the firms that own the commodities (and their factors of production) are the biggest beneficiaries of rising commodity costs. That's precisely what's been going on this year -- just take a look at oil and gas producers, which have already seen average gains of 15% year-to-date.
That's not to say that all resource stocks are sitting high on the hog right now. With heavy shorting in a handful of resource plays, investors could be looking at a major short-squeeze opportunity as underlying assets climb higher.
Related: Two Pair Trades to Play It SafeA short squeeze is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors, causing share price to skyrocket. One of the best indicators of just how high a short-squeezed stock could go is the short interest ratio, which estimates 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. Naturally, these three plays aren't without their blemishes -- there's a reason that these stocks are being heavily shorted. But for investors looking for exposure to a speculative play with a beefier risk/reward tradeoff, these could be powerful upside plays for the coming year. And because these stocks benefit from large asset bases buoyed by increasing market prices, they have some of the strongest snapback potential out there. With that, here's a look at resource stocks with short squeeze potential in 2011.
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