Why You Should Be Near-Term Bearish on Salesforce Stock

CRM is lagging the market and lagging the tech sector

CFA, Senior Market Strategist
Apr 15, 2022 at 9:00 AM
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The below is an excerpt from this week's episode of Schaeffer's Playbook of the Week, featuring Schaeffer's Senior Market Strategist Bryan Sapp, CFA.

I released my short-term bearish stock pick of Salesforce Inc. (NYSE:CRM). The tech stock that everyone has loved for the longest time is starting to crack and show signs of weakness.

*Since this bearish stock pick was released, CRM has dropped nearly 5%.*

I really liked this set up for a short on tech. Salesforce stock is already down 23% year-to-date and is also down 15% year-over-year, so we clearly have some relative weakness. CRM is actually lagging the general market and lagging the tech sector. While Salesforce stock was a big winner for a long time, its now showing signs of breaking down.

I have highlighted the February 24 lows in the chart below and, after testing a series of higher highs, that trend has given out. This could be a potential sign that the bounce is over and we are ready for the next leg down.

Salesforce stock, Salesforce.com stock, CRM stock

 

Technically, Salesforce stock has been showing relative weakness lately. If you look at the 14-day Relative Strength Index (RSI), it's showing a bearish divergence below 50. There are also some key levels to trade overhead.

On the sentiment front, I was kind of blown away when I saw the analyst configuration for CRM. We are looking at 24 "buy" ratings and 3 "hold" ratings, and not a single analyst has a "sell" rating on Salesforce stock. That means everyone is already invested and bullish. The analysts are already pushing it.

With earnings coming up at the end of May, you have big downgrade potential heading into CRM's earnings report. All the covering analysts are already bullish and they are already saying "buy" even while the stock is starting to roll over. This doesn't mean that the 24 buy analysts need to come out and say "strong sell." All they have to do is downgrade to a "hold" rating. I think these potential downgrades will weigh on Salesforce stock as more tech sector earnings are released in the coming weeks. If we see that initial tech earnings are weak, it also increases the potential for CRM downgrades ahead of earnings.

Finally, I took a look at the ISE/CBOE 10-day put/call ratio for CRM. Over the last 10 trading days, the ISE and the CBOE - the two big options exchanges - had a put/call ratio of 0.4 despite relative weakness. That means that, for every put that was purchased, there were two and half calls purchased. As a contrarian trader, this makes no sense whatsoever. We have Salesforce stock trending lower, breaking down technically, and everyone is buying calls on it?

At Schaeffer's, this kind of thing is our meat and potatoes. We like to look at negative sentiment on stocks that are rising or positive sentiment on stocks that are declining. With these optimistic analysts and that tiny put/call ratio, there is clearly enough bullishness to go around as CRM continues trending lower and displays signs of vulnerability. This is something I'd consider trading by buying put options

Join Schaeffer's Playbook of the Week now and tune in every Monday morning at 8:30 a.m. to get ready for the trading week with me. Click here for more information to get started.

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