Potential Short Squeeze In Jefferies

06/10/08 01:25:39 PM

by Mike Carr, CMT

This investment bank may see at least a short-term rise if short-sellers are forced to buy in at current levels.

Security: JEF
Position: Buy

Jeffries (JEF) is one of a long list of investment banks looking for capital. However, a bottom may be in based upon the technical picture (Figure 1). The monthly chart shows a severely oversold stock. Prices closed below the lower Bollinger band for three straight months. This is unusual action in any stock, since Bollinger bands are designed to contain about 95% of the price action. Stochastics just signaled a buy, and the moving average convergence/divergence (MACD) is steadily improving.

FIGURE 1: JEF, MONTHLY. This chart shows that the stock seems to be moving away from an extreme oversold condition.

Graphic provided by: Trade Navigator.

The daily chart (Figure 2) offers more arguments for the bulls. Price is above its 20-day moving average and has held there despite a recent selloff. Stochastics traced out a bullish divergence as price tested the moving average. And the MACD turned bullish after more than a month of signaling lower prices.

FIGURE 2: JEF, DAILY. This chart indicates momentum is pointing toward a sustainable price rise.

Graphic provided by: Trade Navigator.

Additional bullish support is found in the large short interest in JEF. Buyins.net reports that shorts will need more than a week of normal trading volume to cover their positions in this stock. Almost 15% of the float in JEF has been shorted, which creates potential demand when shorts cover their positions. The squeeze trigger represents the average price level where short positions were initiated. At this level, many shorts are likely to cover their trade and find a more profitable opportunity in the market. Buyins.net calculates that the average short is close to a losing position since the squeeze trigger is 18.69. In addition, the 0.50 a share dividend paid by JEF must be covered by the shorts, creating more pressure on these traders.

JEF represents a strong buy. The shorts must contend with limited supply. Insiders own almost 40% of the stock and money manager Leucadia National has taken advantage of recent weakness to increase its position to 30% percent of the outstanding stock in JEF. Add in the shares held by index funds and there isn't much left for the shorts to buy when closing their trades. There also can't be many sellers left to cause further declines.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."