Normally, when we opine about using sentiment as a trading tool, we tend to reference situations where “the Street” is betting against a good stock going higher. For instance, short squeezes happen when the Street loads up on bearish bets against stocks that are likely to continue outperforming the market — the bears turn to bulls, driving prices higher as they capitulate.
The same calculus can be used on the flip side — to find blue-chip stocks and other companies to avoid or short.
By monitoring call options activity, technical trends and other sentiment indicators you can easily find stocks that are set to slide down the “slope of hope” instead of climbing the “Wall of Worry.” These usually wind-up being the stocks that the crowd flocks from as sellers, pushing prices even lower.
On average, a stock with moderately traded option volume will have an open interest put/call ratio of around 0.9, meaning that there are 90 puts open for every 100 calls. Our experience is that a ratio below 0.5 conveys an optimistic outlook on behalf of options investors as the number of calls now doubles puts (50 puts for every 100 calls). Similar, but converse, to the short squeeze situation we often identify, all it takes in these situations is for a stock to make an unexpected move lower to shake the bulls out of these stocks, resulting in selling pressure.
Here’s a look at three blue-chip stocks we think could crumple in coming weeks.
Blue-Chip Stocks to Sell or Short: Yahoo! Inc. (YHOO)
Investors have been jumping back on the Yahoo! Inc. (NASDAQ:YHOO) bandwagon as of late as Marissa Mayer has been able to get some results. Of course, much of the recent success came at the hands of Yahoo’s holdings in Alibaba Group Holding Ltd (NYSE:BABA), which won’t be a long-term driver.
Options traders have driven the put/call ratio to 0.54, suggesting that the options crowd’s outlook may be a little too lofty. After climbing to $50, YHOO shares have lagged the market and appear ready to test technical support at $42.50.
Our expectations are that these bullish traders will shake out of the stock at this level, forcing a move to $36.50, where YHOO stock would begin to look attractive as a bullish pick-up.
Blue-Chip Stocks to Sell or Short: Alibaba Group Holding Ltd (BABA)
Speaking of Alibaba Group Holding Ltd (NYSE:BABA) …
Alibaba’s options activity has been optimistically skewed lately as it appears that the options crowd is betting on a rally from its post-IPO low price. Unfortunately, we just don’t see it playing out that way.
Our current short-term target for BABA is $75, which will include and exodus of the bulls to help drive lower prices and volatility. In addition to heavy call activity, 91% of the analysts with a recommendation on the stock have it ranked a “buy,” putting BABA stock at risk for further downside from downgrades.
Bullish call buyers should be buying some downside protection from puts instead of hoping for profits from the calls.
Blue-Chip Stocks to Sell or Short: Host Hotels and Resorts Inc (HST)
The dividend play on Host Hotels and Resorts Inc (NYSE:HST) has been alive and well for years now as the Fed has kept a lid on interest rates. Now these blue-chip dividend stocks might be set to see a migration of dividend yielders from these positions as interest rates appear set to rise in the second half of 2015 (according to the most recent Fed Funds Futures data).
Option investors have been loading up on bullish calls as the current ratio of calls is four times the number of puts open on Host. We’ll see these options trades capitulate and start buying more puts over the next month as HST stock is likely to touch the $18 mark, which in our mind is the price to start buying calls.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
