The S&P 500 is at a four-year high and the investors that continue to try and fight the current bull market are taking a beating. There are a large number of stocks that trade with high short positions, even as the market is at highs.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

The short interest ratio on a stock is the amount of trading days it would take for all the shorts to be covered with average volume. For example, a short interest ratio of 8 would suggest it will take eight trading days for all the short positions to be covered if that was the entire volume each day.

When stocks are trading near highs and breakout to new levels it often will trigger a short covering rally as the short sellers give up their bearish bet and cover the position. To cover the position the short sell must buy back the stock and thus creates a large wave of buying; the end result is a stock rally.

SEE: Short Interest: What It Tells Us

Four stocks generated by a scan that searches for potential short covering candidates are highlighted below:

Realty Income (NYSE:O) has a short interest ratio of 8.5 and recently hit a new all-time high.The company owns a portfolio of commercial retail properties throughout the U.S. The rebound in retail REITs and the 4.5% dividend yield on the stock only increases the odds of higher prices. The shorts are betting that the consumer spending will slow and retail-related REITs will be hard hit. So far, the bulls have gotten this one right.

Canadian telecom products and services company Telus (NYSE:TU) has a short interest ratio over 100, according to the numbers. This number is extraordinarily high, but with average volume of only 131,000 and 19.42 million shares shorted, it works out. The stock is within a few percentage points of an all-time high set in 2007; a breakout above that level could easily spur on a short covering rally. The price to watch is $62.46. The bonus for TU is the 4.3% dividend that the stock pays to investors. This would be considered a risky play due to the stock trading just below important resistance.

The Fresh Market (Nasdaq:TFM) is an operator of grocery stores and as of last month it operated 115 stores in 21 states. The short interest ratio is 13.3 and the stock that went public in late 2010 is trading within 1% of its all-time high. The stock does not pay a dividend and trades with a PEG ratio of 1.8, which is not attractive, nor is it a negative number. The trend has been solid for TFM and the grocery store sector and it appears that will continue even as the shorts try and fight it.

The Ultimate Software Group (Nasdaq:ULTI) is a software-as-a-service company that falls into the growingly popular cloud-computing sector. The stock has a short interest ratio of 13.0 and is within 2% of an all-time high.There is no dividend payout and the PEG ratio is a higher 2.85, however the momentum in ULTI and the cloud-computing sector as a whole make the stock an interesting play.

The Bottom Line
I would never suggest an investor purchase a stock based solely on the short interest ratio. The number is a tool to use in finding new ideas and can be used as a predictor to a potential short covering rally. Investors must respect what the company does as well as its other fundamentals and the chart when deciding on a potential purchase.

SEE: 5 Must-Have Metrics For Value Investors

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  2. Chart Advisor

    Pay Attention To These Stock Patterns Playing Out

    The stocks are all moving different types of patterns. A breakout could signal a major price move in the trending direction, or it could reverse the trend.
  3. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  4. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  5. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  6. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  7. Technical Indicators

    Using Pivot Points For Predictions

    Learn one of the most common methods of finding support and resistance levels.
  8. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  9. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  10. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  1. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  2. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  3. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  4. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  5. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  6. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>

You May Also Like

Trading Center