With burgeoning global credit and economic crises facing consumers and investors alike, the warm glow of McDonald's (NYSE: MCD, Stock Forum) Golden Arches has never looked more appealing. Armed with a dollar menu and product pricing that will not starve your wallet, the company has quickly become not only a cost-effective alternative to dining out, but also a solid defensive play in the current market environment. What's more, the stock's technical and sentiment backdrops indicate that more gains for MCD shares could be on the horizon.
From a technical perspective, the stock is off a mere 4.6% on a year-to-date basis, compared to the S&P 500 Index's (SPX) loss of more than 44%. In fact, MCD has outperformed the SPX by nearly 40% on a relative-strength basis during the prior 60 trading days. On a short-term basis, the equity has trudged through the recent broad-market volatility with determined resolve, settling into a rough sideways trend between support at the 55 level and resistance near the round-number 60 area. The shares currently enjoy the support of their 10-week moving average, while facing potential overhead resistance at their flatlining 20-week trendline.
Despite difficult short-term market conditions, MCD remains locked in a strong long-term uptrend. The shares still maintain support at their 20-month moving average, which is currently located in the 55 region. What's more, the security has closed only one month below this trendline since May 2003. Meanwhile, October's low near $46 per share was contained by the stock's rising 40-month moving average, providing an additional layer of technical support for the security.
As with most retail-oriented companies, investors have taken a decidedly negative view of McDonald's. Options traders have expressed a distinct preference for MCD puts, as the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.33 indicates that these bearishly oriented options easily outnumber their call counterparts among near-term options. Furthermore, this ratio ranks above 87% of all those taken during the past year, meaning that speculative investors have been more down on MCD only 13% of the time in the prior 52 weeks.
Checking in with data from the International Securities Exchange, puts bought to open have outnumbered calls bought to open on its exchange during the past 10 trading days. This ratio currently rests above 92% of all such readings taken in the past year. From a contrarian standpoint, this rising pessimism on an outperforming stock, such as MCD, has bullish implications.
Finally, Wall Street is also firmly entrenched in the bears' camp. According to Zacks, 8 of the 14 analysts following MCD rate the shares a "hold." With more consumers turning to lower costs dining options, and the shares continuing to hold their own in the current market environment, there seems to be an increased likelihood of upgrades from this bunch of holdouts. Such an unwinding of bearish sentiment could send MCD though short-term resistance at the 60 level and extend the stock's long-term uptrend.
By Joseph Hargett