Even if you haven't been keeping a close watch on the market lately, it doesn't take much of a sixth sense to figure out how investors are feeling right now. Investor anxiety is off the charts in 2016, and it shows.
According to the AAII's U.S. Sentiment Survey, individual investors are less optimistic now than they were back in the middle of 2008's selloff. And overall, short selling is the highest it's been since the 2008 financial crisis. Those are some pretty stark stats.
That overwhelmingly bearish sentiment is actually creating some important buying opportunities in the market's most hated stocks. Put simply, being short is a crowded trade right now -- some of the stocks that the herd hates the most are actually the ones that have the most upside potential in 2016.
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.
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.
For our purposes, 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.