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Potential Short Squeezes in the Semis


With Intel's strong numbers last night, the question becomes will the shorts run for cover in other semiconductor names?


With Intel's (INTC) strong numbers last night, the question becomes will the shorts run for cover in other semiconductor names? I note that in the past two months there has been serious short covering in the semiconductor space with the Erlanger Semiconductor Sector Short Intensity dropping from a peak in July of 63% to the current low of 37%. An explanation of short intensity needs to be provided.

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Erlanger Short Intensity is found by first developing an Erlanger Short Ratio for each stock. The Erlanger Short Ratio is simply shares short divided by the average volume over the past twelve months. My firm uses average volume over the past twelve months for our short ratio while the rest of the world uses average volume over the past twenty trading days. The reason we use twelve months is that it smooths out the changes in volume due to earnings and or upgrades and downgrades as well as unusual volume days.

Once we have a short intensity ratio then we can determine the range of the short ratio over time. So let's take an example. Atmel Corporation (ATML) has an Erlanger Short Ratio of 3.76 and that gives it a short intensity of 99%. Therefore, to determine the Erlanger Sector Short Intensity Ratio we simply add all the stocks in the Semiconductor Sector and determine the average short intensity for this universe of stocks. Clearly, with the Erlanger Short Intensity of 99% Atmel is an outlier in this sector.

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I note that Intel has rather light short selling as the Erlanger Short Intensity level is 4% with an Erlanger Short Ratio of 0.62. The short ratio is often referred to as the "days to cover" and it alerts us to how many days it would take the shorts to cover their shares based on the number of shares short and volume. Therefore, Intel is really seeing its stock bid higher by natural buyers rather than those feeling the pain of a short squeeze.

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The big question is how do we know that Intel is not in a short squeeze while Atmel is? For each stock my firm builds the Erlanger Technical Rank which tracks price action over the past 100 trading days. A rank of 10% is the worst and 100% the best. In the case of Intel, coming into last night's earnings the Erlanger Technical Rank was 50%. So with light short intensity and an average Erlanger Technical Rank I do not view this as a short squeeze candidate. Whereas Atmel had an Erlanger Technical Rank of 70% with Short Intensity of 99%. Currently there are 14 stocks in a short squeeze within the Semiconductor Sector including Rambus (RMBS) and PMC Sierra (PMCS).

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