Schaeffer's Trading Floor Blog

Chart to Watch: Lorillard Inc. (LO) Surges Amid Rumors

LO tags new high as buyout speculation swirls

by 3/3/2014 3:08 PM
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Lorillard Inc. (NYSE:LO) has surged dramatically today, tagging a new record high of $54.07 in the process. (At last check, LO was up 9.5% at $53.72.) Spurring today's unusual price action is speculation that the company could be a buyout target for sector peer Reynolds American, Inc. (NYSE:RAI).

After a months-long downtrend that saw the stock lose almost 13% from its Nov. 20 high to its Feb. 12 low, LO shares had recently been consolidating atop their 160-day moving average. Today's sharp move lifted them above their descending 40-day moving average, which had served as overhead resistance for much of the last three months.

Daily chart of Lorillard Inc. (LO) since November 2013 with 40- and 160-day moving averages

Meanwhile, should these M&A rumors end up being greatly exaggerated, today's breakout could still be further nurtured by a capitulation among skeptics. Wall Street, for example, has maintained an overwhelmingly tepid view on the shares, awarding just two "buy" ratings along with six "holds" and one "strong sell." In fact, the 12-month price target of $50.75 is well below the stock's new high pegged earlier today. A shift to the bullish side of the fence via upgrades and/or price-target hikes could result in additional buying demand.

What's more, the equity's Schaeffer's put/call open interest ratio (SOIR) of 1.81 indicates that put open interest nearly doubles call open interest for options expiring in the next three months. This ratio is in the upper one-third of all readings taken during the last year, suggesting the short-term options crowd is more put-skewed than usual.

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