Continued improvement in the global economy helped propel Wall Street to rather impressive gains last year. The Dow Jones Industrial Average (DJIA) added 18.8% for the year, while the S&P 500 Index (SPX) vaulted some 23.5% higher. The Nasdaq Composite (COMP), however, put its brethren to shame by soaring some 43.9% in 2009. Within the technology sector, the S&P North American Technology-Multimedia Networking Index Fund (NYSE: IGN, Stock Forum) added more than 52% last year. However, the group has since slowed its ascent to a crawl, leaving the sector quite vulnerable.
After tagging a low near the 14 level in early March, IGN began an impressive rally along the support of its 10-week and 20-week moving averages. However, the exchange-traded fund's (ETF) rally hit a snag in late September, when IGN was rejected at resistance in the 28 region. The ETF has since traded between this resistance level and support in the 25 area. The security still maintains support at its weekly trendlines, but the recent stagnation could lead bullish investors to take profits and look for greener pastures.
One of the IGN holdings most vulnerable to a downside move in the sector is Research In Motion Limited (NASDAQ: RIMM, Stock Forum); (TSX: T.RIM, Stock Forum). RIMM is currently the No. 3 holding in IGN, accounting for 7.18% of the fund. Fundamentally, the company posted a third-quarter net profit of $1.10 per share on Dec. 18, as revenue grew 41% to $3.92 billion. Wall Street was expecting earnings of $1.04 per share on revenue of $3.78 billion.
There is no arguing with RIMM's quarterly results, and the company appears to be on solid fundamental footing. But, investors were apparently looking for considerably better figures from the BlackBerry specialist. Since peaking at $71.60 per share on Dec. 18, RIMM has since plunged more than 12%, dipping back below former resistance at the 65 level in the process.
Technically speaking, the stock continues to struggle with overhead resistance at its 10-month and 20-month moving averages. RIMM has not closed a month above these long-term trendlines since August 2008. What's more, this duo is poised for a bearish cross - a technical formation that could signal additional losses for the security. The next potential backstop for RIMM resides at the round-number 60 level, which the shares may retest in short order.
Despite the poor technical performance, optimism is running rampant on RIMM. The equity's Schaeffer's put/call open interest ratio (SOIR) of 0.56 indicates that calls nearly double puts among near-term options. This ratio also ranks just 16 percentage points shy of an annual low, pointing toward excessive bullish sentiment from options speculators.
What's more, data from the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) reveal that calls bought to open have more than doubled puts purchased during the prior two weeks. RIMM's resulting 10-day ISE/CBOE call/put volume ratio of 2.08 arrives in the 77th percentile of its annual range, meaning that options traders have rarely snatched up calls at a faster pace in the prior 52 weeks.
Elsewhere, 26 of the 50 analysts following RIMM rate the shares a "buy" or better. Additionally, Thomson Reuters reports that the consensus price target rests at $92 per share - a whopping 44% premium to the stock's Monday close. Both indicators leave plenty of room for downward revisions, which could provide additional selling pressure for RIMM shares.
In conclusion, while RIMM may have provided strong numbers for the third quarter and guided higher for the fourth quarter, it seems that investors were already expecting impressive numbers from the firm. Given this data, it would appear that there are very few RIMM buyers left on the sidelines, leaving the shares vulnerable to a continued sell-off.
Disclosure: Joseph Hargett has no financial interest in any of the equities or products mentioned in this column.