Secondary squeeze: exploring 3 highly shorted stocks

As the year came to a close in 2023, the market edged toward its all-time high, with the SPDR S&P 500 ETF Trust NYSE: SPY trading at its 52-week high. Previously beaten-down stocks with a high short interest were a significant area of focus for investors and traders as they surged higher in price. 

This was a prevailing theme in the final stages of last year as several high-shorted stocks experienced major surges as the broader market was performing well, led by the technology sector, and trading near highs. Several factors, including increased risk appetite and heightened investor optimism, fueled this theme. 

However, the market experienced a lackluster start during the first two weeks as the new year began. During this period, several of the previously beaten down high-shorted stocks that ran rampant in the year's final quarter lost steam and dramatically declined. Three of last year's top-performing, highly-shorted names have all significantly underperformed since the start of the year. Affirm NASDAQ: AFRM has dropped over 14% year-to-date, Carvana NYSE: CVNA has declined around 15%, and Upstart NASDAQ: UPST has plunged 20%. 

However, with the market fresh from making a new all-time high on Friday, is investor optimism about to lead to a secondary squeeze higher in these high-flying stocks from last year? Well, let's look at each name's current short interest levels and where they are positioned on their chart. 

Affirm Holdings NASDAQ: AFRM

While shares of Affirm have lost over 14% since the beginning of the year, the stock remains in an uptrend and up over 130% over the previous three months. Notably, the stock recently pulled into a significant support area, near $40, and held firmly. If the stock can break its short-term downtrend and hold over $44, a secondary leg higher and continuation of its uptrend might ensue. 

The short interest has declined over the previous month but remains elevated. As of December 31, 17.45% of the float was sold short. The current short volume in AFRM is 39.2 million shares, down 7% from the previous month. 

The sentiment in AFRM remains bearish, as the stock is a lowest-rated stock, with analysts forecasting over 47% downside according to the consensus price target.

Carvana NYSE: CVNA 

Like Affirm, Carvana is also a member of the lowest-rated stocks list, with analysts rating the stock as Reduce and forecasting over 17% downside. 

Despite its recent performance, the stock still boats staggering gains, up almost 600% over the previous year. However, substantial resistance exists near $55, an area where the stock has struggled to hold above since July of last year. 

Unlike Affirm, the short volume in CVNA has increased significantly over the previous month. As of December 31, 37.6 million shares were sold short, a 7.69% increase from the prior month. Should the stock begin to base over $50, near its $55 resistance, short sellers may question whether the weakness experienced so far in the year will continue. 

Upstart NASDAQ: UPST

Like the stocks mentioned above, the sentiment in Upstart is overwhelmingly bearish. The stock features on the lowest-rated stocks list. Analysts have expressed caution on UPST with a reduce rating and consensus price target forecasting more than 22% downside. Five of the eleven analyst ratings have the stock as a sell, four as a hold, and two as a buy.

Unlike the chart positioning of the above two stocks, the 20% decline year-to-date may have completely shifted the momentum in UPST. Given the extent of the recent decline, the stock is now trading back in the range it traded before it broke out in December of last year. Therefore, it will be a tall order for the stock to reclaim higher prices now that substantial overhead may exist. 

The short interest remains elevated in the stock, which, as of December 31, was 30.3 million shares sold short, a 1% decline from the previous month.