Instant information at your fingertips at any time of the day. From the trivial to the earth-shattering, people are able to access more information now than ever before thanks to the Internet. It has spawned a bevy of online retailers, social networking sites like Facebook, and little popular oddities like Twitter, bringing news and new toys to people at faster and faster rates.
From Wall Street's perspective, this sector has been a stronger-than-expected performer. The Internet HOLDRS Trust (HHH) has put in a year-to-date gain of more than 24%, outpacing the S&P 500 Index's (SPX) loss of more than 2% and the tech-laden Nasdaq Composite's (COMP) gain of roughly 5%. In fact, HHH has soared nearly 70% from its November lows and is now perched on its 50-week trendline. Potential support is also rising into the region in the form of the best stock's 10-week moving average.
Meanwhile, options players have built up a sizable bearish position toward the trust. The Schaeffer's put/call open interest ratio (SOIR) rests at 1.40, as put open interest outweighs call open interest among options slated to expire in less than three months. This reading is also higher than 86% of all those taken during the past year, indicating that short-term speculators have been more skeptical of the shares just 14% of the time. What's more, the number of HHH shares sold short jumped 33% during the past month, and now represents more than six times the trust's average daily trading volume.
Digging into the Internet sector, one stock that has easily outperformed the pack is online travel guru priceline.com (PCLN). The equity has soared from its October low of $45.15, gaining more than 100% as it has been guided higher by its 10-week and 20-week moving averages. In fact, April marked the security's first monthly close above both its 10-month and 20-month trendlines since June 2008.
Despite the stock's stellar performance, we continue to see signs of heavy pessimism from investors. The SOIR rests at 1.13, as put open interest outnumbers call open interest among near-term options. This reading is just 10% away from an annual pessimistic peak.
What's more, short sellers have jumped on this outperforming stock in an effort to call a top to its gains. Nearly 10 million PCLN shares have been sold short, accounting for almost 25% of the company's total float. Furthermore, this accumulation of bearish bets is 9.9 times the stock's average daily trading volume. An unwinding of these pessimistic positions could fuel a significant rally in the shares.
To take advantage of a continued uptrend in the shares of PCLN, traders should consider a 100-strike call option - the July call (premium is 8% of the stock price) or October call (premium is 14% of the stock price).
Google Inc. (GOOG)
Elsewhere on the Internet, it appears that Google Inc. (GOOG) may be poised for a pullback amid its recent uptrend. The equity staged a nice rally from its November low of $247.30 to its May peak of $412, resulting in a gain of 66.6%. However, the stock has recently dropped below support at its 10-day and 20-day moving averages as it has encountered some technical resistance in the 400-410 region. Furthermore, the security has dropped below support at its 50-week moving average.
As the stock struggles from a technical perspective, we find that optimism is actually on the rise toward the shares. The SOIR for GOOG has dropped from 0.84 on May 12 to its current perch of 0.81. During this time frame, the number of call options in the front three months of options increased at a much faster pace than the number of put options.
What's more, the International Securities Exchange (ISE) has reported an increase in call trading. During the past 10 trading sessions, 1.36 calls have been purchased to open for every one put purchased to open on GOOG. This 10-day call/put volume ratio is higher than 75% of all those taken during the past 52 weeks.
Finally, Wall Street is thoroughly enamored of the shares. Zacks reports that all 21 analysts following GOOG rate it a "buy" or better. Any downgrades from this pack of optimists could pressure the shares lower.
Yahoo! Inc. (YHOO)
One final stock worth watching is Google's main rival, Yahoo! Inc. (YHOO). Like the rest of its Internet brethren, the stock has enjoyed a steady rally from its November low of $8.94 to its recent peak above $15.80, earning it a sizable gain of more than 77%. The stock has been guided higher by its 10-week and 20-week moving averages. While the shares have recently pulled back, they are perched atop the 14.50 region, which is not only the site of former resistance, but is also home to the stock's 10-day and 20-day trendlines.
Sentiment toward the shares is relatively pessimistic at the moment, as investors are giving the stock's uptrend the cold shoulder. The SOIR of 0.55 is higher than 90% of all those taken during the past 52 weeks. In other words, options players have been more skeptical of the shares only 10% of the time during the past 12 months.
In addition, the number of YHOO shares sold short jumped by 6% during the past month to 43 million shares. This accumulation of bearish bets represents a relatively mild 3.4% of the company's float, but an unwinding of these shares could add some lift to the stockl.
Finally, we find that Wall Street is definitely bearish when it comes to its outlook for the shares of the Internet company. Zacks reports that the stock has earned five "buys," 11 "holds," and three "sell" ratings. This pessimistic configuration leaves ample room for potential upgrades, which could propel the security sharply higher.
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