WINDERMERE, Fla. ( Stockpickr) -- News events have the power to create big volatility in stocks, and one event that can move them substantially higher or lower is an earnings release. Combine a bullish earnings report with a stock that's heavily shorted and you have the fuel that can ignite a large short squeeze.
Short-sellers hate being caught short a stock that announces bullish earning and forward guidance. When this happens, we often see a tradable short-squeeze develop as the bears rush to cover their positions and avoid huge losses. Even the most skilled short-sellers know that it's never a great idea to stay short once an earnings event sparks a big short-covering rally.
This is precisely why I search the market for heavily shorted stocks that are about to report earnings. You only need to find 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.