DryShips Inc. (DRYS) Defy the Skeptics

This article highlights the broad-market patience among the investing crowd, who have "learned to take lavish fleets of corporate jets and outlandish executive bonuses more or less in stride" during the past year. However, the Motley Fool argues that DryShips (DRYS: sentiment, chart, options) shareholders have taken it on the chin more than most, thanks to the shipping issue's "triple play share dilution."

While it would be easy for the Street to forgive DryShips' latest dilutive transgression, the columnist says, controversial CEO George Economou "does not have a clean track record." In fact, some of his fellow shipping execs agree, including Genco Shipping (GNK) Chairman Peter Georgiopoulos, who once suggested that Economou is "play[ing] games with their shareholders' money." On that same note, the author points to a recent warning from Anastassis Margonis, president of Diana Shipping (DSX), who cautioned that his peers' insistence on proceeding with orders for new vessels could end in "disaster for the shipping markets."

The Fool seconds Margonis' theory; according to the article, the impact of failed ventures could result in an "unwelcome domino effect rippling through banks, shipping companies, and even the shipyards." In fact, says the writer, with vessels selling for a 60% discount and bankruptcies a growing possibility, the sector's "weak medium-term outlook" is becoming more evident.

Contrarian Takeaway:

Technically speaking, the shares of DRYS have sailed higher recently, outperforming the S&P 500 Index (SPX) by an impressive 46% during the past 60 trading sessions. The best stock for 2010 is now attempting to find a foothold in the 5 region, home to its 10-week moving average, which hasn't been breached on a weekly closing basis since mid-March. Furthermore, the June 5 strike is home to roughly 12,000 open put positions, which could provide options-related support in the near term.

On the sentiment front, not everyone agrees with the Fool's humdrum outlook for DRYS. In fact, just this week, brokerage firm Dahlman upgraded the stock to "hold" from "sell." Plus, there could be more where that came from, as Zacks reports that only one of the six ranking analysts rate DRYS a "buy" or better. In addition, Thomson Reuters pegs the average 12-month price target on the top stocks for 2010 at only $4.79, representing a 24% discount to the security's intraday high today.

Should fundamental concerns ease and the stock's muscle on the charts continue, the bears among the brokerage bunch could abandon ship. A fresh wave of upgrades and/or price-target boosts could help DRYS sail higher in the near term.
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Highest Option Volume for the Week Ending Monday, May 18, 2009
Ticker Symbol	Call Volume	Put Volume	Total Volume*	Put/Call Ratio
Spdrs(SPY)	276,970	423,878	700,848	1.53
Bank of America Cp(BAC)	393,026	170,308	563,334	0.43
Citigroup Inc(C)	358,706	170,009	528,715	0.47
S&P 500 Index(SPX)	238,569	205,343	443,912	0.86
Nasdaq 100 Index Trckng Stck(QQQQ)	184,431	183,044	367,475	0.99
Ishares Russell 2000 Index(IWM)	71,355	172,664	244,019	2.42
Sel Sec Spdrs Fd Financial(XLF)	57,824	72,371	130,195	1.25
Microsoft(MSFT)	74,781	17,118	91,899	0.23
General Electric Co(GE)	49,689	33,673	83,362	0.68
Russell 2000 Index(RUT)	42,769	39,613	82,382	0.93

Highest Option Volume Compare to Average Volume for Week Ending Monday, May 18, 2009
Ticker Symbol	Call Volume	Put Volume	Total Volume*	5-week Avg Volume	Volume Ratio	Put/Call Ratio
Bp Plc (BP)	1,437,817	19,859	1,457,676	413,244	72.40	0.01
Cnooc Ltd (CEO)	178,467	1,618	180,085	47,250	110.30	0.01
Ei Dupont De Nemours Co (DD)	299,073	10,013	309,086	87,258	29.87	0.03
Emerson Electric Co (EMR)	216,535	6,829	223,364	69,718	31.71	0.03
GeoEye Inc (GEOY)	8,427	9,557	17,984	5,535	0.88	1.13
Plum Creek Timber Co (PCL)	187,662	1,476	189,138	51,346	127.14	0.01
Petrochina Co (PTR)	675,148	4,194	679,342	175,857	160.98	0.01
SAP AG (SAP)	186,251	22,013	208,264	61,769	8.46	0.12
Total SA (TOT)	173,672	882	174,554	46,391	196.91	0.01
United Technologies Cp (UTX)	421,816	12,204	434,020	133,339	34.56	0.03

 

Currently, many retail stocks appear to be overbought, which is something to consider if you are overweight this sector. Along these lines, the S&P Retail SPDR Fund's (XRT) put/call ratio is at relatively high levels and trending higher, indicating that the trade could be getting a little crowded. However, as long as the XRT put/call ratio continues to trend higher, we'd expect pullbacks in these names to be buying opportunities. Technically speaking, Netflix (NFLX) and Amazon.com (AMZN) have rallied 24% and 46%, respectively, so far in 2009, while Buffalo Wild Wings (BWLD) has soared more than 36%. By comparison, the SPX is sitting on a year-to-date loss of 2.14%. Despite this strong technical backdrop, there is a wealth of pessimism levied against these hot stocks for 2010. Specifically, NFLX sports a short-to-float ratio of 33%, while 10 of the 13 analysts following the shares rate them a "hold" or worse. Elsewhere, 29.5% of BWLD's float is sold short, while six of the 11 brokerage firms covering the stock rate it a "hold" or worse. Should this wealth of negativity start to unwind, we could see additional gains from these select names within the retail

 

The energy sector has come on strong recently, with the Select Sector SPDR Energy Fund (XLE) soaring more than 28% since setting a near-term low in mid-March. Growing confidence that the global economy is contracting at a slower pace has also helped push crude oil prices steadily higher, with the July futures contract treading water just below the round-number 60 level -- a region that crude has not seen since November 2008. As far as the XLE is concerned, the stock's 50-day buy-to-open call/put volume ratio on the International Securities Exchange (ISE) and the Chicago Board Options Exchange (CBOE) is turning higher from its near-term lows, and should prove to be a bullish sign for the sector. However, traders should avoid big-cap best energy stocks, such as Exxon Mobil (XOM) and Chevron (CVX), and focus instead on companies similar to Fuel Systems Solutions (FSYS). The company is coming off a strong earnings report, and the shares are up more than 88% since setting a low of 9.83 on March 17. There should be more fuel in the tank for FSYS, as nearly 27% of the stock's float is sold short, while the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.92 ranks above 77% of all those taken in the past year.

 

While the health care sector started 2009 off on the right foot, developments in Washington, D.C., quickly brought the group to its knees. Specifically, some analysts are speculating that President Obama's budget could cut significantly into the Medicare HMO funds put in place by the Bush administration. According to those analysts, these cuts in Medicare Advantage could eliminate 10% of the money that HMOs get from the government for covering Medicare patients. As a result, the normally defensive AMEX Pharmaceutical Index (DRG) finds itself lower by more than 7.6% so far in 2009. What's more, the index has recently encountered resistance in the 250 region. This area is home to the security's declining 20-week moving average, as well as its July 2002 low, which held as support on a closing basis until the index's breakdown in February. Meanwhile, sentiment toward the health care sector remains heavily bullish. Specifically, 52.12% of the 1,248 analyst ratings on health care stocks are "buys," compared to only 4.01% "sells," according to Zacks. Any downgrades for this group could have a negative impact on the pharmaceutical sector.

Option Idea of the Week: priceline.com (PCLN), Google Inc.

priceline.com (PCLN)

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.

Stocks Investment Motivation

In recent articles, I have touched upon issues relating to the idea of knowing oneself as a trader; the necessity of careful self-analysis. One important area I believe many traders gloss over is the concept of motivation. Obviously, on the most apparent level, we are all motivated by the desire to make a profit, but I suggest it might be prudent to dig a little deeper in recognizing additional factors that may motivate us.

Over the years, particularly in the seminar setting, I have run across a significant number of people who look upon trading as a get rich quick endeavor that requires little effort. While I concede that almost anyone can occasionally land a big return with a lucky play, it is the trader who treats his efforts as a business that is more likely to succeed. Let's face it, we all have some level of greed; it is a part of our humanity. But greed unchecked can be one of the greatest dangers any trader faces. It encourages us to take foolish risks. I have often related the story of a seminar student who began trading very well. He was trading directional options and had several consecutive winners. Each day he would call me reporting on how much he had made but then the phone went dead. I thought he might be vacationing on his profits. After a few weeks I called him only to find that he had lost it all. Instead of managing his money, he, in essence, "bet it all on black." He bought short term out of the money directional options before an earnings announcement and on the announcement (even though it was positive) the 2010 best stock gapped down and with little time remaining to expiration, he was wiped out.

When I tell people that story, the reaction is "how foolish" that would never happen to me. I'm sure the subject of my anecdote thought exactly the same thing -- that it could never happen to him, but it did. He was, and undoubtedly still is, a very bright man whose greed and impatience sucked him into making one foolish decision with catastrophic results.

Two major premises of my book, "Trade Your Way to Wealth," are the importance of appreciating risk as well as focusing upon reward and the necessity of treating trading as a business. In my view, many unsuccessful traders focus only on the positive possibilities when entering a trade. They fail or refuse to see and understand the risk until it is too late. I suggest it is better to look at the risk first and decide how to handle it before ever entering a position. Sure, losses will be incurred, but we can still be just fine if they are controlled.

A second element often found in our motivation is impatience. We are looking for the quick buck. Those kinds of trades definitely do occur, but I personally prefer the "get rich steady" over the "get rich quick" approach. Please don't get me wrong, getting rich quickly is fine, but, in general, that isn't so likely. In my new book, "Smart Investors Money Machine," I discuss a variety of ways to create numerous streams of income. Most of us need income to pay our bills each month and if we can utilize strategies in addition to a job to add to our income, it seems we can be better off financially. In "Smart Investors Money Machine," I try to show the reader a variety of ways that can be accomplished using different techniques and differing investments while pointing out those that require less effort as well as those that may require a fairly high level of monitoring. These are ways almost anyone can add income to their lives, but which few bother to do.

Ultimately it comes down to motivation. What steps are you willing to take to improve your financial lot?

We really enjoy trading best stocks for 2010 that are $10 and under. Often they provide the chance to enjoy high percentage gains. With that opportunity comes additional risk so we try to watch trendlines and support levels in an attempt to minimize any losses.

Chart by StockCharts.com

EP (El Paso Corporation)
Company Profile
$10 Trader was able to close another profitable position this past week enjoying a 13% before commission gain on EP in less than a month. The best stock has since retreated a bit and is approaching both a price and trend support. A bounce from there could be reason for a re-entry.

Our Option Trading Service is for conservative traders that understand leverage principles. We focus on powerful option trading strategies that place volatility and momentum in your favor. And we pride ourselves on minimizing our losses. We always know our downside potential in a trade.

CBS (CBS Corporation)
Company Profile
While there is some overhead resistance around $10, CBS has shown some strength in the current uptrend. I'm looking for a favorable entry for a 5/10 or maybe a 5/15 LEAPS call debit spread.

Trend trading as we try to practice it is a form of momentum trading. We prefer to try to capture profit out of the middle of the trend rather than try to catch reversal at bottoms and tops.

CYBS (CyberSource Corporation)
Company Profile
CYBS has been trending up and has recently been dealing with the trend line. I'm watching for a bounce up off the trend and an ability to hold above $14.

TIN - Temple-Inland Inc. is currently trading at $10.97. The June $10.00 Calls (TINFB) are trading at $1.75. That provides a return of about 8% if TIN is above $10.00 on expiration Friday in June.