Schaeffer: Going Long and Short

10/22/2004 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

While many advisors focus only on a positive or negative general market outlook, Bernie Schaeffer continually uncovers the best bullish and bearish positions in any current environment. Here he looks at two stocks on the long side, and two on the short side.

"With crude near all-time highs, oil stocks continue to be a hot sector. In fact the AMEX Oil & Gas Index has outperformed the S&P 500 since November. Nevertheless, investors remain skeptical of oil stocks. What's more, short interest jumped 15% higher in September, as short sellers flocked to the group. Within the sector, Amerada Hess (AHC NYSE) continues to be a stellar performer. Since the start of the year, the shares have ramped up more than 60% along their intermediate-term trendlines. The equity has also dashed ahead using the support of its 10-month moving average. Surprisingly, options players have exhibited a preference for puts and an unwinding of this reserve of pessimism could push AHC higher. For options traders, we recommend buying the Amerada Hess May 80 call.

"Pessimism continues to mount toward Verizon (VZ NYSE), the cellular blue chip. Short sellers advanced their positions by 4% over the past month, pushing the number of shorted shares to a two-year high. Furthermore, it would take 4.62 days to cover this hefty accumulation of bearish bets. Should investors be forced to buy back these positions, VZ could benefit from a nice short-covering rally. Wall Street has also taken a bearish stance toward the equity, as 15 of the 27 covering analysts rate the shares a ‘hold’ or worse. Potential upgrades from this group of holdouts could send VZ soaring higher. Technically speaking, the security has advanced solidly along support at its 20-day moving average, overtaking potential resistance at the round-number 40 level. Furthermore, VZ has outperformed its peers in the Dow on a relative-strength basis since July. Options traders should buy the Verizon April 35 call.

"Optimism continues to blanket Best Buy (BBY NYSE), the electronics retailer. Investors have added calls at a faster pace than puts in the front three months of options. What's more, only 5% of the security's float has been sold short. This lack of short interest sharply reduces the chances of BBY benefiting from a short-squeeze situation. Meanwhile, Wall Street remains enchanted by the retailer as more than three-quarters of the brokerage firms following BBY rate it a ‘buy’ or better. Any downgrades from this smitten bunch could spell trouble. Technically, the shares have rallied back into staunch resistance at the 55 level. This region has capped a number of rally attempts since 1999. For options traders, we suggest buying the Best Buy March 60 put.

"Tyco International (TYC NYSE) has experienced a rough couple of months, declining nearly 10% since hitting a 52-week high in late June. This technical breakdown has taken the security below former support at its 10-week and 20-week moving averages. What's more, these intermediate-term trendlines recently completed a bearish cross -- a technical formation that often signals continued weakness in the shares. However, sentiment remains relatively positive toward the security. Wall Street maintains its bullish outlook for TYC, as 10 of the 13 covering analysts rate the equity a 'buy' or better, and none rate the shares a 'sell.' Any downgrades from this cheery group could spell trouble for the security. What's more, the 59.5 million TYC shares sold short account for less than 4% of the stock's total float. This pittance of bearish bets would offer up little in the way of support from a short-covering rally. For options traders, we suggest buying the Tyco April 32.50 put."

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