Long and Short-Term Ideas for Palm

01/23/2009 10:33 am EST


Nick Perry

Equity Options Trader, Schaeffer's Investment Research

A look over today's posts shows that Palm Inc (PALM) pops up a few times. The company's name turns up on both the heavy volume scan as well the short interest scan. Those appearances were then followed by news of a downgrade from J.P. Morgan and skepticism on the company's products. In other words, this appears to a situation where analysts aren't enthusiastic and short sellers have a large position. That is an interesting combination when you consider the stock is up over 400% from its closing lows in early December. Of course, that is only part of the overall picture.

The weekly graph below shows the recent rally in the context of the overall trend. While the rally has been extremely sharp, it has only recouped the drop from September to the December lows. Nonetheless, the stock has at least demonstrated an ability to move.

Checking data from Zacks shows that J.P. Morgan isn't the only firm with some reservations about where Palm shares go from here. Only 3 of 16 analysts (a mere 19%) rank the stock with a buy rating. I think that is a very interesting piece of data to keep in mind. With the stock firmly off its lows and showing signs of life, this sets the stage for an eventual sentiment shift. It usually takes The Street a while to warm back up to a stock, so I wouldn't expect to see a slew of upgrades here. This is more of a longer-term catalyst and something I will be watching over the coming months.

Over the short-term, it seems likely that short covering has played at least a part in the recent rally. According to data collected by our Quantified Analysis group, 38% of the stock's float was sold short at the last reporting period. This sort of buying can feed on itself and produce the types of run-ups seen below. The action tends to be fast and violent, so keep that in mind.

By Nick Perry of Schaeffer’s Trading Floor Blog

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