Smartphones have quickly become the greatest thing since sliced bread for the wireless and handheld sector. Gone are the days when the slick clamshell design of the Motorola RAZR was enough to virtually guarantee success. Throughout this revolution, cellphones have practically become pocket PCs, and every manufacturer in the world is attempting to get in on the action.
With the pool of rivals growing at a seemingly exponential rate, prospects for the three most revered smartphone makers are becoming increasingly grim. In fact, companies such as
Did you buy $100 Apple May calls in the past month? How about Broadcom at the $20 strike? Click here for next week's trades in Bernie Schaeffer's Option Advisor. |
While Apple was far from first on the scene in the smartphone market, the arrival of the company's industry-defining iPhone, complete with a slick touch-screen user interface and an award-winning digital music player, quickly placed CEO Steve Jobs' firm at the top of the heap. Even industry leader Research In Motion followed Apple's lead and created a touch-screen version of its extremely popular BlackBerry line of smartphones. Apple changed the game once again by beating smartphone makers to the punch when it included 3G support in its second iteration of the iPhone.
Smartphones are not cheap, and prospects for slackening consumer demand due to tightening budgets prompted selling pressure to sweep across the sector in late 2008. AAPL shares, once trading near $200, plunged more than 54% in 2008. An, while the stock did eventually hit bottom in November 2008, the chilling effect of the recession has held the equity in check for the ensuing months, with AAPL trending sideways between support at the $80 level and resistance near the century mark.
In early March, evidence that the economic downturn was slowing provided a much needed boost for AAPL. The stock vaulted higher, logging a year-to-date gain of more than 51%, vs. the S&P 500's gain of roughly 0.5%. What's more, AAPL has enjoyed the support of its 10-day and 20-day moving averages since March.
Apple shares now face another technical test before they can continue their recent turn of good fortune. AAPL was recently rejected by long-term resistance at the $135 level--a region that capped the equity in February and March 2008. Additionally, the stock's 20-month moving average is descending into the area, and could complicate matters further.
AAPL's sentiment backdrop is also a concern for the stock's bullish case. Currently, the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.02 ranks above 91% of all those taken during the past year, but developments within the options pits point toward a spike in optimism just as AAPL encounters technical resistance.
According to the International Securities Exchange and the Chicago Board Options Exchange (CBOE), approximately 1.6 calls have been bought to open on their exchanges for every put purchased during the prior two weeks. This ratio ranks above 60% of all those taken in the past year, pointing toward rising expectations even as AAPL struggles with technical resistance.
Short interest in Apple has jumped 13% since February, rising nearly 2% during the most recent reporting period. However, the short trade is far from crowded, as only 2.35% of AAPL's float is sold short. Should these bearish investors gain confidence following the stock's recent rejection at the $135 level, it could increase selling pressure on AAPL shares.
Finally, expectations are running high on Wall Street. Currently, 16 of the 25 analysts following AAPL rate the shares a "buy" or better, with only one "sell" rating to be found. Furthermore, Thomson Reuters reports that the average 12-month price target for AAPL rests at $145.29 per share, a nearly 15% premium to the stock's current trading range below $127 per share. Any downgrades or price-target cuts could provide additional downward pressure for AAPL. To take advantage of this potential weakness, investors should consider the stock's July $130 put.
As the manufacturer of the device sometimes nicknamed "CrackBerry," Research In Motion once enjoyed near total dominance over the smartphone market. That is, until Apple's iPhone loosened RIMM's hold on the sector. The BlackBerry is still arguably the top dog, but the sniper hit from Apple and the global economic recession have taken quite a toll on RIMM shares. In fact, RIMM plummeted more than 51% in 2008.
The security has made quite a comeback this year, soaring more than 89% so far in 2009. But RIMM is facing technical issues very similar to Apple's. The stock was recently rejected by resistance at the $78 level, the site of its post-plunge peak set Sept. 26, 2008. Furthermore, the equity is staring up at potential round-number resistance at the $80 level, as well as its declining 50-week moving average. The combined weight of these technical hurdles has forced RIMM to retreat nearly 8% in the last three trading sessions.
Meanwhile, sentiment is far from flattering for bullish investors. RIMM's SOIR currently resides at an extremely complacent 0.86, in the 56th percentile of its annual range. Elsewhere, call buyers are swamping the ISE and the CBOE, as the duo's 10-day call/put ratio of 1.88 reveals that nearly two calls have been bought to open for every put on these exchanges. This ratio also ranks above 84% of all those taken in the prior 52 weeks, underscoring rising bullish expectations despite weak short-term price action in RIMM shares.
There is also evidence that the stock's recent spurt higher might have been related to short-covering activity. During the most recent reporting period, the number of RIMM shares sold short plunged by more than 19%. That said, there is very little fuel left in the tank, as less than 4% of RIMM's float remains sold short. In fact, we could see these bearish investors return to the security, emboldened by the stock's failure to overcome technical resistance.
Downgrades could also be a concern for RIMM. It's garnered 18 "strong buys" and six "buys" vs. 10 "holds" and just one "sell." Any downgrades from this bullish bunch could send the security sharply lower. Traders looking to do a little bearish BlackBerry picking should consider the stock's September $75 put.
Palm, once the king of the handheld device market, has had to fight an uphill battle against both RIMM and AAPL to regain a foothold. Palm is slated to release its own entry into the touch-screen market later this year, along with a slick new mobile operating system. The move has prompted questions of legal action from Apple, as the new Palm Pre, with webOS, performs remarkably similarly to Apple's iPhone. Still, the Pre revelation has inspired PALM investors, and the shares are making a comeback.
Technically speaking, PALM has rocketed more than 240% higher in 2009, enjoying near flawless support from its rising 10-week moving average. Furthermore, the equity has not closed a session below its 10-day and 20-day moving averages since March 9. The stock met with a spot of technical resistance near the $12 level on May 7, but the pullback was halted by support at PALM's rising 10-day moving average. Additional support lies just below the shares at the $10.50 level, an area that recently provided short-term resistance. A rebound from this solid support should help propel PALM steadily higher.
Options traders have capitalized on PALM's strong price action, sending the stock's SOIR to a reading of 0.8, in the 35th percentile of its annual range. What's more, the ISE/CBOE call/put ratio has swelled to a hefty 5.72, as calls bought to open more than quintuple puts purchased during the prior two weeks. From a contrarian perspective, this wealth of bullish sentiment is par for the course for this outperforming equity.
Not everyone is quite so optimistic toward PALM, however. Short interest still accounts for a whopping 34% of the stock's total float, despite an 8.8% decline in the number of PALM shares sold short during the most recent reporting period. As the shares continue to defy gravity, more of these bears could be forced into buying back their positions, thus prolonging the stock's rally.
Finally, Wall Street analysts have yet to jump on the PALM bandwagon. According to Zacks, 13 of the 17 brokerage firms following the shares rate them a "hold" or worse. Any upgrades from this bearish bunch could provide additional buying support for the security.
To take advantage of a continued ascent by PALM, traders should focus on the equity's August 10 call.
Joseph Hargett is senior equities analyst at Schaeffer's Investment Research. Click here for more ideas and recommendations, and to learn more about Bernie Schaeffer's Option Advisor.
Full disclosure: Elevation Partners, which holds a 25% stake in Palm, is also a shareholder in our parent company, Forbes Media.
