Short sellers can sometimes be wrong about a stock and sell right before a big upside move. If you're hazy on what short sellers are, they're traders who bet that a stock will decline.
They borrow shares with the hope that the can pay back the shares at a lower price. But when a stock goes up, these traders lose money and are forced to buy back the shares they borrowed to cut their losses. And when these market participants finally cover their shorts on trades that went against them, the rapid buying can give a stock extra fuel to rally.
A big breakout — especially a breakaway gap — forces a short seller's hand. And if you see an enormous increase in volume, take it as a strong hint that short covering is taking place.
The bottom line is that high levels of short interest sometimes work in favor of the bulls. So how can you find out if a stock has high short interest?
Using MarketSurge Charts To Calculate A Percentage
MarketSurge users can go to the top left of the weekly chart and find short interest data.
The number gives you an approximation of trading sessions (based on the average share volume over the past 50 days) that it would take for all the short sellers to close out their positions. Put simply, when you see a high number here, you know that investors are doing a lot of shorting.
Another way to determine short interest is to compare total shares sold short with the stock's float. To calculate, multiply the 50-day average volume by the number of short interest days. Then divide that by the amount of shares in float, and multiply by 100 to get the short interest percentage.
A high ratio — such as 15% or 20% — suggests that the shorts could give a stock a short-term boost in demand. Don't be surprised if you come across a ratio of 25% or more.
Short Interest: A Recent Example With Celsius
Let's take a look at a recent example using Celsius.
In March 2024, the energy drink maker had a 50-day average daily volume of 5,304,600 shares. Multiply that by the number of short interest days (7.3 in this case), and that equaled 38,723,580 shares.
Dividing that result by the number of shares in float, you get a short interest of about 37%.
That means that if Celsius stock were to continue higher, the shorts would be squeezed and forced to buy to cover their positions. And that would lead to more buying demand and potentially a higher price move.
Even before Celsius broke out, IBD noted that the stock's high short interest heading into the company's February 2024 earnings report gave the company a big upside catalyst.
Short Interest Metric In MarketSurge
MarketSurge subscribers can add the short interest as a percentage of float to any list they've saved. Use the column customization to add this data.
Take the MarketSurge Growth 250 list, for example. Once you have the list panel open at the bottom of the screen, click on the wrench icon at the top of the lower panel. Choose "Customize column layout." Under the Miscellaneous section, you'll see "Shrt Int % of Float." Drag the box where you want the column to appear on your list. Hit apply, and you'll be able to sort your list by short interest percentage. This section includes other data points on short interest.
When you're looking for top stocks, treat short interest as a secondary data point. The EPS Rating, relative strength line, quality of mutual fund ownership, and leadership within a dynamic industry group should carry a much bigger weight when considering which stocks to prioritize.
