Technically, MasterCard Looks Like a Short

By Sean Hannon, CFA, CFP, of Covestor.com

Broadly speaking, there are two main groups of investors. Those using fundamentals will analyze a company's business prospects, growth potential and financial structure with the hope of finding stocks that the market has mispriced. Technical investors will rely upon chart patterns and trading activity to decide when to buy and sell securities.

In the current bear market, both groups have faced problems with determining the next move. Fundamentalists have seen cheap stocks become even cheaper. As they deployed capital, losses have mounted and frustration reigns.

With the large drop in stock prices over the past few months, technicians also find themselves in unchartered waters. These investors find themselves looking back many years to determine what the next level of support should be.

While a downtrending stock begs to be shorted, only the bold confidently sell stocks where moving averages and trend lines are far removed from the current price.

This lack of clarity would lead many investors to remain on the edges and refrain from assuming risk. However, there is great opportunity cost with such a stance. Instead, I prefer to find stocks with a downward bias that allow me to hedge my current portfolio yet offer the comfort of a clear technical pattern. This search brings me to MasterCard (MA Quote).

As initially featured in my Weekly Newsletter, MA is a former market darling that has crashed to earth. When most felt the credit crisis was contained, MA was seen as a place to hide. By acting as a transaction processor, MA assumes virtually no credit risk and earns a fee each time its card is used.

If consumer spending held, its business would continue to grow. This thought process led many momentum investors to pile into the stock and drove the price to an all-time high of $320 on June 2. Since that point, a weak market and overvaluation have combined to drop the stock to the current price of $141.40.

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