) -- There are a lot of reasons to short stocks right now. You've probably already heard all the arguments against owning equities: they're expensive; there's the government shutdown to worry about, then there's another debt ceiling; they've already rallied so far so fast.
>>5 Rocket Stocks Worth Buying This Week
But none of that matters. Fact is, the more individual investors hate stocks, the more you should be buying them.
Going back over the last decade, buying heavily shorted large and mid-cap stocks (the top two quartiles of all shortable stocks by market capitalization) would have beaten the S&P 500 by 9.28% each and every year. That's some material outperformance during a decade when decent returns were very hard to come by.
When I say that investors "hate" a stock, I'm talking about its short interest. A stock with a high level of shorting indicates that there are a lot of people willing to bet on a decline in its share price -- and not many willing to buy. Too much hate can spur a short squeeze, a buying frenzy that's triggered by shorts who need to cover their losing bets. And with the rally we've been since last November, you can probably guess that there are lots of losing open short bets.
>>5 Trades to Take for October Gains
One of the best indicators of just how high a short-squeezed stock could go is the short interest ratio, which estimates the number of days it would take for short-sellers to cover their positions. The higher the short ratio, the higher the potential profits when the shorts get squeezed.
It's worth noting, though, that market cap matters a lot -- short sellers tend to be right about smaller names, with micro-caps delivering negative returns when the same method was used.
>>5 Stocks Set to Soar on Bullish Earnings
Today, we'll replicate the most lucrative side of this strategy with a look at
five big-name stocks
that short sellers are piled into right now. These stocks could be prime candidates for a short squeeze in 2013.