... and Shopping for Shorts

10/07/2005 12:00 am EST


Beth Gaston Moon

, Schaeffer's Investment Research, Inc.

The Schaeffer's Equity Scorecard ranks stocks from 1 to 10. We have previously featured the stocks with the highest 10 rating. For those aware of the risks in short-selling, Beth Gaston Moon looks at two retailers with the lowest 1 rating.

"The clothes and accessories at Hot Topic (HOTT NASDAQ) are too hip and trendy for my 30-something blood. The mall-based store caters to shoppers aged 12-22 in its 625 locations and 100 Torrid stores, which offer plus-sized apparel. Much of the retailer's merchandise features licensed TV and music material. HOTT shares have been nothing but cold of late; the stock entered a pronounced downtrend in early June and have spiraled more than 30% lower during the past three months. The equity's ten-week moving average has kept a cap on the stock since mid-June, and the stock has found an even newer foe in the 16 level. This area helped the shares bounce higher late last year, but is now serving to swat the stock lower.

"Despite this poor price action, options players are trying to call a bottom in the shares. The equity's 21-day put/call volume ratio has fallen dramatically since the end of August. This suggests either the increase in call options' popularity, the decrease in put positions, or combination of both. Either way, optimism (or at least complacency) is on the rise. This is also evidenced by a near-extreme in optimism among the options crowd. Meanwhile, short sellers are bailing out of their positions. While this is likely a profit-taking measure, the resultant lack of short-covering potential bodes poorly for the bulls. Analysts are also feeling the heat of HOTT, remaining neutral-to-bullish on the stock. If the stock's technical picture continues to worsen, downgrades could be in the offing.

"Ross Stores (ROST NASDAQ) is a major discount chain based in California. The retailer operates 650 stores, with apparel constituting about 66% of its merchandise. While the stock has been trending lower for the past three months, today the stock enjoyed a slight boost as JP Morgan upgraded its rating to ‘neutral’ from ‘underweight.’ There are now five strong buys, three buys, and six holds, with only one sell rating. This is a mighty bullish background for a stock that has lost nearly one-quarter of its value since mid-June. The equity could experience a short rally today, but longer-term resistance continues to plague the shares.

"In other sentiment news, short interest plunged by 35% last month to 3.2 million shares, a multi-year low. Only 2% of the stock's float is now sold short. Thus, should ROST post any good news, the likelihood of a short-covering rally is slim to none. What's more, options players are continuing to call a bottom in ROST's downtrend, as they have huddled for warmth in the bullish camp. The equity's open-interest ratio is suggesting that optimism among the options-trading crowd is nearing an annual peak. ROST currently posts a Schaeffer's Equity Scorecard rating of just 1.0 – our lowest rating - thanks to slumping short-interest numbers, declining techs, and bearishly configured insider trading. This low reading implies with some certainty that the equity's current path of least resistance is pointed lower."

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