Schaeffer's Tool Box: Monster Worldwide Defies Analyst Expectations

              

When setting their investing strategies, traders often consult the opinions of the Wall Street experts, otherwise known as stock analysts or brokerage firms. Analyst rankings are an important sentiment indicator that we track here at Schaeffer's, since they are a quick way to gauge how Wall Street feels toward a certain stock. Analysts use different ranking systems based on the preferences of their specific brokerage firms. These rankings are labeled "buy," "outperform," "overweight," "neutral," "sector perform," and so on. For our purposes, we typically rely on the data gathered by Zacks, which divides the analysts' opinions into five broad categories: strong buy, buy, hold, sell, and strong sell.

These ratings become a source of particular interest when they're adjusted, since analyst upgrades frequently result in buying pressure, whereas analyst downgrades often lead to selling pressure. Naturally, the more "buy" ratings levied against a security, the more likely the shares are to be downgraded, and vice versa. It is this potential for adjustment that is the lynchpin of today's Schaeffer's Tool Box filter. By selecting either the "Analyst least liked stocks" or the "Analyst most liked stocks" option in the Schaeffer's stock screener, we can find a list of equities that have attracted a heavy degree of "buys" or "sells," respectively, or those stocks most likely to be downgraded or upgraded.

Let's say that you are looking for a bullish trade to take advantage of the market's recent upside bias. From a contrarian perspective, you would want a stock that has strong price action, but a heavy degree of "sell" or "hold" ratings from the brokerage community. The idea behind this methodology is that these bearish analysts may be forced to reconsider their negative ratings given the stock's strong technical performance, thus giving rise to upgrades that could increase buying pressure.

The easiest way to find such a potential bullish trade using the Schaeffer's stock screener is via the "Analyst least liked stocks" filter option. By selecting this option, the filter will return only those securities with strong price action and an unusually high degree of negative analyst ratings.

With the basics of our quest for a potentially bullish trading idea nailed down, there are a few more settings to tweak. Below are my personal favorites:

• Analyst least liked stocks
• A minimum stock price of $10 per share
• Minimum put & call open interest of 10,000 contracts
• Minimum average daily stock volume of 100,000
• Trading above their 20-day moving average
• Stocks near an annual high
• Total analyst rankings greater than 10

For a more in-depth rundown of the Schaeffer's stock screener, you might want to start by reading this primer.

Stock Selection Via Sentiment

After sorting the results in descending order according to their 60-day relative-strength versus the S&P 500 Index (SPX), we arrive at several interesting prospects. Monster Worldwide Inc. (MWW: sentiment, chart, options) rises to the top of today's results due to the fact that the stock has bested the SPX by more than 71% on a relative-strength basis. The equity has also been targeted by a heavy degree of analyst and investor pessimism. Specifically, 13 of the 16 brokerage firms following MWW rate the equity a "hold" or worse, creating the potential for upgrades, as we mentioned above.

Meanwhile, options traders are also heavily negative toward the security, as its Schaeffer's put/call open interest ratio (SOIR) of 0.77 ranks above 86% of all those taken during the past year. Finally, more than 13% of the stock's float is sold short, providing fuel for a potential short-covering rally should these bears be forced to buy back their positions in order to limit losses.

Without getting too bogged down in the details, the key takeaway from this sentiment backdrop is that investors are not looking for MWW to extend its strong price action, creating the potential for an upset. If the shares continue to rally, then put open interest could unwind, short sellers could begin buying back their positions, and/or brokerage firms could upgrade the shares. Since we entered into this filter expecting to find a bullish trading idea, these drivers make for compelling arguments in favor of MWW's upside potential.

Getting Technical

While all of today's filter results are pre-screened to be outperformers, not all uptrends are created equal. As such, it is important to look at your potential trading ideas a bit more closely from a technical perspective. Drilling down on Monster's (MWW: sentiment, chart, options) price action reveals that the shares have rebounded solidly since bottoming in early March. During this time frame, the equity has soared more than 135%, bolstered by support at its rising 10-day and 20-day moving averages. MWW was recently rejected by overhead resistance in the 15 area, but bounced back after finding fresh support at its 10-month trendline.

The emergence of the 10-month moving average is key for MWW, as this trendline had provided staunch resistance from May 2007 through March. With this long-term moving average now flatlining, it could continue to buoy the equity in its current battle with short-term resistance near the 15 level.

There are a few detractors in this technical backdrop, however. First, the 15 area recently rejected the equity, and could pose a significant short-term hurdle for MWW. Second, the stock's 20-month trendline could still be a limiting factor in MWW's rally. That said, this long-term trendline currently rests more than 42% above the equity in the 20 area. If MWW can move convincingly above the 15 level, there should be pretty clear sailing.

Stock Selection

So, we've run a filter looking for a bullish trading idea, discovered that MWW has plenty of potential for upgrades from Wall Street analysts, as well as plenty of potential sideline money in the form of negative investor sentiment. We have also seen that the stock has plenty of room to run from a technical perspective, once the 15 level is taken out. What's next? If you aren't satisfied with MWW's prospects, you can repeat the process again, starting with your filer results. But what if you want to move forward with a bullish MWW trade? Well, if you are a stock trader, you would simply set your stop-loss and target at comfortable levels, and purchase the shares. Assuming you are comfortable with a potential loss of about 7-8%, a stop-loss on a trade below the 13 level could be a good starting point, as it means that MWW will have dropped convincingly below short-term support at its 10-day and 20-day moving averages. Setting the target depends on whether you expect the shares to be stopped at the 15 level, or continue on to the 20 level (as mentioned above).

Option Selection

For options traders, the same reasoning applies to your expectations and risk tolerance apply. With less time premium built into the price, a June option would be less expensive, but offer less time for your expectations to play out. You would want to avoid this month unless you had reason to believe that MWW will achieve your goals before the options expire on June 19. Given the data above, a less aggressive approach would be to trade the July or September options. Choosing an option in July will incur additional costs due to the added time premium, but it will give you more time for the trade to play out.

Let's say that with MWW hovering below $14 per share in today's trading, you choose to enter the in-the-money July 12.50 call. The option is currently trading with an ask price of $1.80, meaning that one contract would run you about $180, sans brokerage fees. In order for this trade to reach breakeven (i.e. in order for you to make your money back), MWW would need to rally to the 14.30 level at expiration. It is important to remember that there is the potential for technical resistance at the 15 level, which could impact returns on the position. If you don't believe that the shares will overcome this hurdle, then you might want to reconsider entering this trade or select a different option.

However, if you expect MWW to break out above the 15 level and rally up to the 20 level (the next potential layer of technical resistance), then this trade could prove quite lucrative. In the event of a best-case scenario based on these expectations, where MWW jumps to the 20 level, the July 12.50 call would be worth $7.50 at expiration, netting you a gain of about 300% on the trade at expiration, compared to the stock trader's gain of only 42.8%.

Remember, your risk tolerance may be different from my own, and I encourage you to expand on the research I've done here to arrive at your own conclusions. And always remember to set your stop-losses and targets before entering a trade.