Will these 3 heavily shorted stocks keep squeezing?

Key Points

• As the market nears highs, heavily shorted stocks have surged.
• Short squeezes have been driven by optimism and increased risk appetite.
• Is the upward momentum fading for AFRM, CVNA, and UPST, possibly leaving them overbought due to the squeeze losing steam?

As the overall market edges closer to its all-time high, with the SPDR S&P 500 ETF Trust NYSE: SPY trading at its 52-week high, highly shorted, previously beaten-down stocks have been a significant theme and area of focus for investors and traders.

Why has this been the case? High-shorted stocks often experience dramatic surges and short squeezes when the broader market performs strongly and trades near all-time highs. This phenomenon is fueled by a combination of factors, including increased investor optimism, heightened risk appetite, and a rush among short sellers to cover their positions amid rising prices. 

Rising market optimism intensifies pressure on short sellers, causing rapid price spikes. Three specific stocks, marked by high short interest and remarkable triple to quadruple percentage gains, exemplify this trend.

Now, the question arises: has the short squeeze lost steam, potentially leading these stocks into extremely overbought territory? Let's delve deeper into each case to find out.

Will these three heavily shorted stocks keep squeezing?

Affirm Holdings NASDAQ: AFRM operates a global digital and mobile commerce platform, offering point-of-sale payment solutions for consumers and merchants. Partnerships with banks and capital markets allow consumers to make purchases and pay over time, with terms extending up to 60 months.

The company’s stock has rapidly increased throughout the year. Year-to-date shares of the payment solutions company have skyrocketed over 400% and almost 150% in the last three months. However, as the stock trades just 5% away from its 52-week high and up nearly 100% over the previous month, its RSI is now in overbought territory, reading 71.68.

Although from a technical point of view, the stock may be due for a pullback, the short interest remains elevated and has risen almost 4% over the previous month. 21.07% of the float is sold short, the highest since May. 

Carvana NYSE: CVNA is an online platform primarily operating in the United States, focused on automotive retail. It facilitates buying, selling, and financing vehicles through its website, offering customers a simplified and digital car purchasing experience.

Carvana, perhaps owing to its widespread bearish sentiment, has been a standout performing large-cap stock in 2023. Year-to-date, the stock is up a whopping 1,054%. Still, it is one of the lowest-rated stocks, with analysts rating it as Reduce and forecasting almost 32% downside. 

Over the previous month, the short interest rose almost 2% to 16.31%, or 32.5 million shares sold short. Coming off recent 52-week highs, the crucial factor influencing whether the stock's upward momentum will persist lies in its ability to maintain stability around the $60 mark and establish a stronger support level.

Upstart Holdings NASDAQ: UPST is a lending platform in the United States that employs AI technology to make credit decisions. It offers loans for various purposes, leveraging advanced algorithms to assess creditworthiness beyond traditional factors.

Despite the overwhelming bearish sentiment, shareholders of Upstart have enjoyed a fruitful year, with the stock up 234% year-to-date. Despite its recent breakout and surge high above key moving averages and resistance near $30, the stock is not yet overbought, with its RSI at 66.94. 

Notably, the short interest for UPST is 43.66%, one of the highest levels across all major U.S. exchanges. That short interest equates to 31.5 million shares sold short. With a staggeringly high short interest, the stock is not yet overbought territory. Now consolidating above $40, a breakout above its most recent high could spark further upside momentum and squeeze.