The reoccurring theme in 2021's stock market is the rise of the retail investor. While the growing populous of retail traders has grown thanks to the pandemic, this past January saw the rend really take shape. This is when shares of heavily shorted stocks including GameStop (GME) and AMC Entertainment (AMC) surged. The initial spark originated on discussion boards like Reddit where traders circulated details of hedge fund short positions suggesting this as an attack on helpless companies down on their luck thanks to mass shutdowns. 

In something more akin to a scene from the movie, The 300, retail traders came to the rescue and, at the same time, made their place in the market known. No longer would they be referred to as dumb money. Now, many are calling themselves apes, and all are focused on 1 thing: teaching the “hedgies” a lesson. So far, this war cry has brought millions of “average" traders together looking for the next stocks to target in this latest social justice advocacy-fueled initiative.

Hedge Funds Feel The Heat

While some may assume that the hedge funds would simply outspend even the largest retail traders, some have felt the wrath. Not only did they get caught up in heavily over-leveraged positions but this Reddit social justice has caused regulators to pay attention to more than who's “pumping” on social media sites. Last week, Financial Times reported on the first major casualty of what I'll call “Revenge of the Meme Stonks.” London-based hedge fund White Square Capital, run by former Paulson & Co trader Florian Kronawitter suffered losses betting against US retailer GameStop during the first big move in January. You've also got other firms like Melvin Capital and Light Street Capital which have both been able to lick their wounds from their bad bets on meme stocks earlier this year.

You've not only got issues with social media becoming the new soapbox. But you've also got the fall-out from these initiatives that has clearly raised the eyebrows of regulators. The massive Archegos blow-up raised plenty of questions on how the fund's transactions were masked by different tactics. The allowed the fund to gain more leverage than it should have. Ultimately, the breakdown of Archegos led to massive sell-offs in stocks like Viacom (VIAC) and Discovery (DISCA) along with a basket of plenty of other stocks including Baidu (BIDU), Tencent Music (TME), and banks linked to the fund including Credit Suisse (CS) and Nomura (NMR).

Knowing that there is a possibility to affect real change in the market, the hoards of retail traders grew in size and scope. Now the hunt has begun with these retail sharks smelling blood in the water wherever they can track down a scenario where high short interest could get a squeeze. Other stocks that got caught up in the January explosion were Koss Corp. (KOSS), Nokia (NOK), Trivago (TRVG), Bed, Bath, & Beyond (BBBY), BlackBerry (BB), Castor Maritime (CTRM), American Airlines (AAL) and Express (EXPR). What's more, the vast majority of these names were trading as penny stocks prior to the retail rally. Multiple platforms, including Webull and Robinhood, even restricted access to many of these names either offering closing transactions only or only allowing a certain number of shares or options contracts to be purchased.

In a blog post that has gone down in history, Robinhood wrote, “We continuously monitor the markets and make changes where necessary. In light of recent volatility, we are restricting transactions for certain securities to position closing only, including $AAL, $AMC, $BB, $BBBY, $CTRM, $EXPR, $GME, $KOSS, $NAKD, $NOK, $SNDL, $TR, and $TRVG. We also raised margin requirements for certain securities.”

This, of course, brought additional interest from government officials like Elizabeth Warren. She called on the Securities & Exchange Commission to do something more than sit back and watch. We also saw supporters of the movement help turn up the volume of this social justice initiative. Mark Cuban, Chamath Palihapitiya, and Dave Portnoy were among the loudest to voice support of this.

High Short Interest Stocks To Watch Next

While many of these so-called Reddit stocks have settled down, others remain red hot, like AMC. Furthermore, the hunt is on for more stocks with higher short interest. The important part to remember as a trader is that these instances can become incredibly volatile. Most don't perform on a longer-term scale, as GameStop and AMC stocks have. Nokia, for instance, jumped for a single day and fell back almost to where it began, the day following the breakout. So if you are going to approach these supposed “short squeeze stocks,” I'd make sure to know how to navigate fast-moving stocks.

I took a look at a FinViz scan for stocks with higher short interest. In many cases, there was a history of big moves. For transparency, I looked for stocks with a short-float percentage of over 30% based on the site's data and put together a list of 10 that I thought looked interesting right now. Below I've listed them in order from highest short-float percentage to lowest. Now, whether or not any of these become the “next AMC or GME” is yet to be seen. But for those of you who thrive on stock market data, it's not bad knowing where all the “chips” are. The left column including the companies with the corresponding short percentage in the right column:

Why Are Shorted Stocks A Focus?

If you're newer to trading, this may all seem very foreign. Why should short interest matter, and what would it mean for those invested in these stocks? Well, look at BarChart's Tips On Technicals, and you'll see that this is a sentiment indicator. “The more short interest, the more people are expecting lower prices.” Furthermore, the process of shorting a stock involves the one initiating the short, borrowing shares that ultimately need to be returned. So a simple example is shorting “Stock A” would involve a Trader borrowing shares from a Broker, selling them in the open market, and taking in cash. When it comes time to return shares to the Broker, the Trader will need to go into the market and repurchase those shares. The money left over is the Trader's profit. 

What Happens In A Short Squeeze?

But a Short Squeeze happens when the Trader is forced to buy back shares in order to return them to the Broker, but the price is going higher than where they initially sold the borrowed shares. As they say, buying begets buying, and the short-squeeze becomes an avalanche of short traders buying back shares as well as retail traders buying up other shares in the float for their investment portfolios. There is an unlimited risk when shorting stocks for this exact reason. So when you find a stock that short squeezes, the moves in the market can be exponentially greater than your average uptrend. Clearly, AMC, GME, and plenty of other stocks have demonstrated this phenomenon.

When it comes to short interest, the numbers can be different depending on where you look. For instance, I used data from FinViz, but if you look at other platforms, there may be slightly different data given depending on which figures these outlets are using and where they're deriving their own data as well. Needless to say, it doesn't hurt to have a general understanding of stocks with potentially higher levels of short interest in the event they become the newest target of a Reddit-fueled rally.