Delivering a Cautious Message

01/13/2010 12:00 pm EST


Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Joseph Hargett of Schaeffer’s Investment Research says shares of package delivery firm UPS face significant technical tests, and there may be too many bulls on the stock.

 According to a recent Forbes article (“UPS Is One Attractive Package,” January 8th), Tom Reese and Paul Rubillo of added United Parcel Service (NYSE: UPS) to their Recommended list. UPS currently offers a dividend yield of 3.14%, and the company's improved fourth-quarter outlook piqued the duo's interest.

For the record, UPS lifted its earnings expectations for the quarter to a range of 73 cents to 75 cents per share from prior guidance of 58 cents to 65 cents. The new guidance also topped the consensus target of 63 cents per share.

As one of the catalysts for [its] boosted guidance, the company announced it would cut 1,800 management and administrative jobs, while lowering the number of districts and regions in its US small package division. As a result, UPS said it will incur a one-time charge in 2010 that will be offset by savings in its US business.

UPS shares cleared a key technical hurdle [recently], breaking out above the round-number $60 level in the wake of the company's improved guidance. The $60 region had provided a ceiling for the equity since early October, and could now provide technical support.

However, UPS is still staring up at its 150-day moving average (at $62.57), a trend line that has capped the security since November 2007. What's more, the $63 region, which rests just above UPS (it closed above $62 Tuesday—Editor), is home to a 61.8% Fibonacci retracement level. Clearly, the stock is far from being out of the woods from a technical perspective.

UPS's sentiment backdrop also offers up a questionable outlook for the security. Specifically, optimism is running rampant in the options pits, with the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.69 ranking below 78% of all those taken in the past year.

What's more, data from the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) supports this heavily bullish stance from the options crowd. Currently, UPS' s ten-day ISE/CBOE call/put ratio of 2.22 indicates that calls bought to open have more than doubled puts purchased during the prior two weeks. This reading also arrives in the upper 20% of its annual range, meaning that options traders have rarely snatched up calls at a faster pace.

The bottom line is that while UPS has shown strong price action in the wake of its recent earnings announcement, the stock is still vulnerable to a reversal if certain technical hurdles are not swiftly dealt with.

If the shares are unable to move above the $62.50-$63 region, we could see some of that bullish sentiment in the options pits unwind in the form of selling pressure. What's more, if such a reversal were to push the equity back below the round-number $60 level, it could be bad news for UPS bulls.

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