When investors look for the best opportunities in the stock market, one gauge they often look at is whether people (retail and professionals) are buying a stock. However, not many know that the same strategy can be flipped on its head, and it works better than focusing on only the buying side of the equation.
By finding stocks that are being oversold, particularly with high short interest, investors can tap into opportunities that carry a short squeeze potential. A short squeeze happens when a stock that has been too heavily shorted runs higher in price, which then forces the short sellers to cover (close) their positions, which involves buying back the stock. Of course, this buying activity creates even more upward pressure on a stock’s price.
