BALTIMORE (Stockpickr) -- Volatility is getting squeezed back into stocks this week, brought on by crashing Ruble and oil prices and a correcting stock market. That means that the "fear trade" is back in play, a fact that's evidenced by the 75% gain in the VIX Volatility Index since the first week of December.
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Put simply, there's a lot of hate that's getting dumped into the markets this week.
The good news is that you can use all of that hate to your advantage. You see, hate is a powerful emotion in the financial markets -- because, very often, it's wrong. That's not just my opinion; the data bear it out as well. Over the last decade, buying the most hated and 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.
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 short sellers who need to cover their losing bets to exit the trade.
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.
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 the months ahead.
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