Should High Short Interest Stocks Be Part Of Your Trading Style In 2021?

Since the first quarter of 2020, the social-sentiment trend began firming up its roots in the stock market. But it wasn't until early 2021 that this phenomenon really took hold. You might say that "COVID stocks" were the original meme stocks. But then you could trackback to cannabis stocks before that, FAANGM, dot com stocks before that, then even cancer stocks much earlier than that. Every year/decade has its macro and micro trends. But I think this is the first time we're really seeing the rise of "the retail trader" in the market. With that, caution has been thrown to the wind, and whether we're talking about this new trend in "Reddit penny stocks" or the latest boost of interest in heavily shorted stocks, retail traders are helping fuel momentum.

If you're like most investors who've been in the market for a while, this new approach to the market is foreign to you. Fundamentals don't seem to matter for these popular stocks. What's more, even in light of "good" fundamentals, retail traders seem to opt for technical set-ups before throwing their hard-earned money into a sound company. Needless to say, it's having an impact on the stock market today. Major ETFs that hold shares of these companies are swaying directional momentum. You've also got entire ETFs solely focused on these "social media" stocks. For instance, the Vaneck Vectors Social Sentiment ETF (BUZZ) focuses entirely on stocks which "exhibit the highest degree of positive investor sentiment and bullish perception based on content aggregated from online sources including social media, news articles, blog posts, and other alternative datasets."

Social Media Stocks Are Now "A Thing"

Of its top holdings, the BUZZ ETF holds shares of Virgin Galactic Holdings Inc (SPCE), Nvidia Corp. (NVDA), Palantir (PLTR), Tesla (TSLA), Apple (AAPL), Advanced Micro Devices (AMD), Amazon (AMZN), Ford (F), Rocket (RKT), and GameStop (GME) as its top ten holdings as of this post. Yes, those are in order of percentage holdings from highest to lowest, as well. These 10 make up about 33% of the ETF's holdings. This apparently is a new signal from Wall Street that the new "investor lunch table" isn't a private room in the back of the Capital Grille but one that is more likely a chat room, Facebook (FB) discussion forum, subReddit, or even a popular Twitter (TWTR) feed.

Gauging social sentiment is simple on the surface but filtering through the noise is the hard part. The fact of the matter is that "popular" social media accounts based only on followers can play a big risk. Why? Well, the fact that you can buy followers is one reason. You've also got to understand the motivation of some of these outlets. Are they truthful in their messages, or is there an ulterior motive to take advantage of their influence over a group of traders? That discussion is something for another time. For this article, we're going to take a closer look at something that these hoards of social media traders are focused on, which is stocks with higher short interest.

High Short Interest Stocks

Short interest is something that traders look at to essentially understand how big the bet is AGAINST a particular stock. Higher levels of short interest suggest that Wall Street doesn't believe in the future potential of a company. This is where we saw shorts building up in GameStop, AMC, and a slew of other pandemic era stocks, feeling the pain from the economy shutting down. But retail traders saw the overly bearish pressure and massive short interest as an attempt by big market hedge funds to completely break these companies and take full advantage of their large cash positions to add even more weight to this short attack. In a similar fashion as The 300, starting in subreddit r/WallStreetBets, thousands of traders took to the market buying up shares of GameStop and forcing the hands of some of the heaviest shorts in GME stock. Firms like Melvin Capital and Light Street Capital were hurt greatly thanks to their bad bets on meme stocks earlier this year. Last week, Financial Times reported that London-based hedge fund White Square Capital suffered losses betting against GameStop during the first big move in January that it will shut its main fund and return capital.

You might disagree with "the movement" because it doesn't align with traditional investing, it might be time to stop ignoring it entirely because it's quickly becoming a major source of market momentum, producing several trade opportunities. Now, before I get to the list of stocks with high short interest, I need to say one thing: just because a stock has high short interest doesn't make it the next AMC or GameStop. There's short interest building for a reason, and it usually isn't because "nasty hedgies" want to ruin a company. A short position is usually based on a bearish thesis stemming from a company's overall fundamental position. Needless to say, it doesn't hurt to understand where things are so you can keep tabs on potential changes in volume or irregular trading activity in some of these stocks:

List Of 10 Stocks With High Short Interest

Company Short %Float
Carver Bancorp Inc. (CARV)


SoFi Technologies Inc. (SOFI) 46.69
PubMatic Inc. (PUBM) 38.43
Workhorse Group Inc. (WKHS) 36.16
Ontrak Inc. (OTRK) 34.43
Geo Group Inc (GEO) 28.43 Inc. (PRTS) 23.97
PetMed Express Inc. (PETS) 23.17
Fastly Inc. Class A (FSLY) 21.11
Upstart Holdings Inc. (UPST) 16.55

Short Float Data From FinViz

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