Identification

• There is an old adage in the market--bears make money, bulls make money, and pigs get slaughtered. The meaning is that it is possible to make money whether the market goes up or down, but those who are too greedy can lose money. When too many short sellers have sold a stock, there is potential for a panic to ensue when buyers begin to buy again. ShortSqueeze.com finds stocks that have the potential to move quickly higher as sellers are squeezed out by buyers.
  
  

Short Selling

• Short selling is the process of selling a stock you do not already own with the intention of buying it back at a lower price. Short sellers borrow stock they believe will move lower from their broker with the intention of buying it back and returning it to the broker by paying a lower price than they sold it for. If it works out as they hope and the price does indeed go lower they profit on the difference between the price they sold the shares and the price they buy them back. If they are wrong and the price moves higher, at some point they will be forced to buy back the shares at a higher price, losing money in the process.
  
  

Short Squeeze

• As mentioned, if a stock that has been sold short moves higher short sellers lose money or profit. The stock market can be an emotional place controlled by the perverse emotions fear and greed. When a stock position is losing money investors can sometimes sell in a panic. The same is true with short sellers. When their position is losing money they oftentimes buy back in a panic. This type of panic buying can lead to a quick price move higher and is referred to as a short squeeze.
  
  

Days To Cover (Short Ratio)

• Stocks that are identified as potential short squeeze candidates are ranked based on a couple of criteria. One of these is the short ratio. The short ratio is an equation that measures how many days it will take short sellers to cover, or buy back, the stocks they have sold short. The more shares of stock that have been sold short, the longer it theoretically takes to buy them back. A high short interest ratio creates a stronger potential for a short squeeze if buyers step in.
  
  

Price Action

• Price action refers to the way a stock has been behaving recently. When a stock that has a large number of outstanding shares short has been moving higher for an extended period of time it is logical that those who are short that stock will feel pain. The higher the share price trades, the more pain they feel because they are losing money or they are giving up profits.
  
  

Considerations

• The short squeeze ranking can be a useful tool, but the stock market is very complex and the price action of a stock is controlled by many factors. A stock with a high short squeeze ranking potentially has a higher than average chance of experiencing a short squeeze, but it is not a silver bullet that can guarantee profits. The future is unknown and short sellers are typically more sophisticated investors than typical investors so a stock that has heavy short interest may sell lower even if it does have a high short squeeze ranking.