Bearish Sentiment Surrounds Inc. as the Stock Rests on Support

03/24/2009 9:57 am EST


Nick Perry

Equity Options Trader, Schaeffer's Investment Research Inc. (SOHU) can't seem to escape the wrath of brokerage firms.  The stocks had dueling analyst downgrades for the stock last Thursday, and the Beijing-based Internet issue attracted yet another bearish note this morning. Specifically, Sterne Agee dropped its rating on the equity from "buy" to "hold."

Option players have also adopted a skeptical stance on SOHU. During the past ten days, traders on the International Securities Exchange (ISE) have bought 11,147 puts on the stock, compared to just 2,891 calls. The equity's ten-day put/call volume ratio of 3.86 ranks higher than 97% of other such readings taken during the past year, pointing to a near peak of pessimism among investors on the ISE.

As a result of the influx of bearish bets, SOHU's Schaeffer's put/call open interest ratio (SOIR) arrived today at 1.44, indicating that short-term option players are more skeptically aligned now than at any other time during the past year. The SOIR has been stuck near annual high territory since March 13, with the indicator barely budging as a result of March expiration last Friday.

In addition to analysts and option players, pessimistic sentiment is also rising among short sellers. The number of SOHU shares sold short jumped by 11.4% during the most recent reporting period, and now accounts for 14.5% of the stock's available float.

While it may seem as though Wall Street can't get much more bearish toward SOHU, that's not quite the case. Thomson Reuters pegs the equity's average 12-month price target at $60.64, a premium of 54% to Friday's closing price. This leaves the shares vulnerable to potential price target cuts during the short term.

Plus, despite the recent wave of downgrades, six out of ten analysts still rate the shares a "buy" or better, leaving room for additional negative notes from brokers. If the Street continues to migrate toward the bearish camp, the stock could be smacked lower.

At last check, SOHU was fractionally higher, resting near chart support at the 38 level. This region has endured multiple tests already in 2009, and it could potentially give way if the stock continues to be hammered by selling pressure.

See chart below:

By Nick Perry of Schaeffer’s Trading Floor Blog

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