WINDERMERE, Fla. (
Stockpickr) -- With earnings season in full swing on Wall Street, it's the perfect opportunity for market-players to create a powerful watch list of stocks that are due to report numbers that are also heavily shorted by the bears.
Short-sellers hate being caught short a stock that produces earnings that please the bulls. When this happens, we often see tradable short squeeze develop as the bears rush to cover their positions to avoid big losses. Even the best short-sellers know that it's never a great idea to stay short once a big short-covering rally is sparked by a bullish earnings report.
This is why I search the market for heavily shorted stocks that are about to report earnings. You only need to find 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.
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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 break out following the report before you jump in to profit off a short squeeze. This way, you let the trend emerge after the market has digested all of the news.
That said, sometimes the stock is going to be in such high demand that you will miss a lot of the move. That's why it can be worth betting prior to the report -- but only 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