Will Wall Street Change Its Tune On Soaring McDonald's Corporation (MCD)?

From a contrarian standpoint, McDonald's Corporation (NYSE:MCD) could still have room to run

by Josh Selway

Published on Apr 1, 2016 at 1:53 PM
Updated on Jun 24, 2020 at 10:16 AM

McDonald's Corporation (NYSE:MCD) shares continue to move higher. For the third consecutive day, MCD has hit a record high, earlier reaching $127.39. The stock was last seen up 1% at $126.98, recently blowing past the $125 area that had been holding back the shares since late January -- making the $130 level the next round-number target. This recent rally began with a jump from MCD's 80-day moving average in March, during which the shares jumped 7.2%. 

Yet, the stock may have more room to run, due to the overwhelmingly bearish sentiment backdrop on Wall Street. Starting with analysts, the majority still consider the shares a "hold" or worse, and MCD's recent show of strength puts it above its average 12-month price target of $126.41. In other words, there's potential for positive analyst notes to push the stock higher -- which is exactly what has been happening lately

Things are even more bearish in the stock's options pits. For instance, at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), 2.62 MCD puts have been bought to open for every call during the past two weeks. This 10-day put/call volume ratio tops 97% of all readings from the past year, meaning option traders have been way more bearish than normal recently. Of course, some of this could be from shareholders hedging their positions amid the stock's surge. 

Speaking of options, it's worth noting that premium on MCD short-term contracts is relatively low right now. This is according to the stock's Schaeffer's Volatility Index (SVI) of 14%, which is just 2 percentage points from an annual low. To put it differently, the options market is pricing in very low volatility expectations for short-term MCD options right now. 

Another indicator to watch going forward is McDonald's Corporation's (NYSE:MCD) 14-day Relative Strength Index (RSI). Right now, this reading stands at 69 -- just a hair from overbought territory.

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