WINDERMERE, Fla. ( Stockpickr) -- News events have the power to create massive volatility in the market, and the one event that can move stocks substantially higher or lower is an earnings release. Take that one step further and combine a bullish earnings report with a stock that's heavily shorted, and you have the fuel that can ignite a large short squeeze in any stock.
Short-sellers hate being caught short a stock that produces earnings that please the bulls on Wall Street. When this happens, we often see tradable short squeezes develop as the bears rush to cover their positions and avoid even bigger losses. Even the best short-sellers know that it's never a good idea to stay short once a big short-covering rally starts that's sparked by an earnings event.
This is precisely why I search the market for heavily shorted stocks that are about to report earnings. You need to find just a couple of these candidates in a year to help enhance your portfolio returns -- the gains become so outsized in such a short timeframe that your profits add up quickly.