David Sterman

The stock market is making things awfully uncomfortable for short sellers. The S&P 500 rose 11% in the fourth quarter of 2011, and is up another 5% this month. That mini-rally has pushed up a number of heavily-shorted stocks, and if history is any guide, a further market rally may cause short sellers to throw in the towel and simply stop "fighting the tape."

If that happens, then some of the most heavily-shorted stocks could be among the market's biggest gainers in the weeks ahead.

By covering a short position, short sellers need to buy back the stock they borrowed, creating its own form of buying pressure. That appears to be what's happening with heavily-shorted retailer Sears Holdings (Nasdaq: SHLD) right now, and Saks (NYSE: SKS) may be the next retailer to benefit from a robust short squeeze. The short interest in Saks rose from 31.5 million shares in the middle of December to 33.3 million shares at the end of the year, representing 15 days' worth of trading volume.

Why so bearish?
I spent a considerable amount of time figuring why short sellers think Saks is ripe for a fall, and it's still a bit of a mystery to me. There are a few issues that short-sellers may be focusing on, but they appear mistaken in their assumptions. Here's a rundown of what they may be thinking and why I think they're wrong...


David Sterman

David Sterman has worked as an investment analyst for nearly two decades. He is currently an analyst for StreetAuthority.com