Stay Away From These Four Heavily Shorted Stocks

By David Sterman

NEW YORK ( StreetAuthority) -- A pretty remarkable shift in sentiment happened in the stock market last month and few may have noticed. The short positions among the most heavily shorted stocks on the stock market shrank by a major amount.

Consider the drop in these short interest positions for stocks that trade on the New York Stock Exchange.

I can't personally recall seeing such a big two-week drop in recent memory. What happened?

Well, the major averages didn't move much during those two weeks, so it wasn't a matter of profit-taking or fears of a short squeeze. Frankly, it's a bit of a mystery and it will be interesting to see the next set of data, scheduled for around July 25 (covering the period through July 15).

Yet, it's noteworthy that the one stock in this table that did see a rise in the short position was eventually hammered -- Supervalu ( SVU) fell nearly 50% on July 11 after the company reported a weak fiscal first quarter and a major restructuring.

This beleaguered supermarket chain has company. Short-sellers have also been targeting chip maker AMD ( AMD), which has the 12th-largest short position on the NYSE. The company recently warned of a quarterly shortfall, and shares are now down nearly 20% since the month began.

Short-sellers also boosted their position in coal maker Patriot Coal ( PCX) a hefty 26% in just the last two weeks of June (to 32 million shares). Days later, the company would declare bankruptcy, reaping a huge payday for short sellers.

Bearish bets also paid off in consumer electronics retailer HHGregg ( HGG). The short position of nine million shares amounted to a whopping 55% of the total float. So after an announcement that quarterly results were dismal, shares slumped a hefty 37% on July 11.

Call it dumb luck, but the four biggest losers thus far in the third quarter were all heavily shorted.

Indeed, whether it's an expected weak quarter or an outright bankruptcy declaration, short sellers are clearly on their game right now. You may want to check out the short position on any of your holdings, and if it's a large one then you need to quickly learn why the short sellers are so bearish. In this market, there's no shame in raising cash, and these heavily-shorted stocks may be good candidates.

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