The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
WINDERMERE, Fla. ( Stockpickr) -- With earnings season under way on Wall Street, it's time for market-players to create a powerful watch list of stocks due to report numbers that are also heavily shorted by the bears.
As a shorted stock produces earnings that please the bulls, the short-sellers will rush to cover their positions, sparking a big rally. The gains can be so outsized that it only takes a few of these stocks in a year to ramp up portfolio returns significantly.
That said, let's not forget that stocks are heavily shorted for a reason. Use trading discipline and sound money management when playing earnings short-squeeze candidates. Sometimes the best play is to wait for the stock to break out. This way, you're letting the trend emerge after the market has digested all of the news.Of course, sometimes the stock is going to be in such high demand that you risk missing a lot of the move. But if you buy prior to the report, buy only if you have a very strong conviction that the stock is going to rip higher, and its acting extremely bullish technically.