WINDERMERE, Fla. ( Stockpickr) -- With earnings season in full swing on Wall Street, it's the perfect opportunity for market-players = to create a = watchlist of stocks due to report numbers that are also heavily shorted by the bears.
Nothing will frustrate a short-seller more than being caught short a stock that produces a positive earnings report. When this happens, we often see tradable short squeezes develop as the bears rush to cover their positions to avoid big 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 a positive earnings report.
This is exactly why I search the market for heavily shorted stocks that are about to report earnings. You only need to find just a few of these stocks 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.
>>Want our earnings coverage on the go? We've got an app for that.That said, let's not forget that stocks are heavily shorted for a reason, so you have to use trading discipline and sound money management when playing earnings short-squeeze candidates. It's important that you don't go betting the farm on these plays and that you manage your risk accordingly. Sometimes the best play is to wait for the stock to breakout following the report before you jump in to profit from off a short squeeze. When you do this, you let the trend emerge after the market has digested all of the news. However, sometimes the stock is going to be in such high demand that you will miss a lot of the move. That's why it's only worth betting prior to the report if you have a very strong conviction that the stock is going to rip higher. Here's a look at a number of stocks that could experience big short squeezes when they report earnings this week.