One Is Too Hot, the Other Too Cold

05/12/2010 11:51 am EST

Focus: STOCKS

Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

Jocelynn Drake, investment analyst with Schaeffer's Investment Research, says market sentiment could be exactly wrong on two stocks in the news.

While Research in Motion (Nasdaq: RIMM) may be struggling with competition when it comes to applications, option players remain optimistic about the stock's prospects. The International Securities Exchange (ISE) has reported nearly two calls purchased to open for every one put during the past 10 trading sessions [as of May 5th]. This ratio of calls to puts is higher than 75% of all those taken during the past year.

Furthermore, the ISE/Chicago Board Options Exchange (CBOE) ten-day call/put volume ratio comes in at 2.56, which is higher than 82% of all those taken during the past year. In other words, short-term option players have rarely been more optimistically aligned towards the shares during the past 12 months.

Wall Street is also smitten with RIMM. According to Zacks, the stock has earned 31 Buy ratings, 13 Holds, and just two Sells. This configuration leaves ample room for potential downgrades, which could weigh on the shares.

Technically speaking, RIMM has gained a measly 2% since the beginning of the year, lagging behind the broad market. The shares have fallen below support at their ten-week moving average and are currently testing support at their 20-week trend line. A breach of this support level could shake loose the remaining bulls, pressuring the stock lower. (Research in Motion closed Tuesday at $67.83—Editor.)

Meanwhile, short sellers have flocked to Coinstar (Nasdaq: CSTR). While the number of CSTR shares sold short has decreased by 5.8% during the past month, nearly 28% of the company's total float remains sold short.

Meanwhile, the Schaeffer's put/call open interest ratio (SOIR) for CSTR stands at 0.48, in the fifth annual percentile, pointing to extreme optimism. However, traders should keep in mind that some of these calls may be used to hedge the wealth of bearish bets on the shares; the sentiment picture may be less optimistic than it appears.

Checking in on Wall Street, we find that nine of the 12 analysts following CSTR rate it a Buy or better.

From a technical perspective, the equity has gained nearly 60% since the beginning of the year. Since reaching a near-term low in late January, the shares have climbed along the support of their ten- and 20-day moving averages. If the equity continues to climb, it may succeed in causing the bears to finally switch camps, creating fresh buying pressure. (Coinstar closed Tuesday at $49.83—Editor.)

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