Here at Schaeffer's Investment Research, we take a three-pronged approach to market analysis, more formally known as Expectational Analysis®. This proprietary methodology has proven its might time and time again by combining fundamental and technical factors, along with investor sentiment, to analyze stocks, sectors, and the overall market. As contrarians, we believe that investor expectations that don't match the prevailing technical trend often offer up opportunities unseen to the naked eye. Using this contrarian approach, our Senior Quantitative Analyst Rocky White uncovered three stocks in the semiconductor sector that could be ripe for the bearish picking, including ARM Holdings plc (NASDAQ:ARMH - 22.06), LSI Corporation (NYSE:LSI - 6.09), and NVIDIA Corporation (NASDAQ:NVDA - 12.82).
Beginning with U.K.-based ARMH... On a technical basis, not only has the stock lost roughly 20% of its value in 2012, but it has also lagged the broader S&P 500 Index (SPX) by 20 percentage points over the past 60 trading sessions. The stock's dismal chart showing has been highlighted by its descending 60-day moving average. In fact, ARMH's most recent rally attempt was quickly rejected by this trendline.
Investors have paid no mind to the equity's technical troubles. During the previous 50 sessions, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open nearly six calls for every put. What's more, this ratio ranks higher than 98% of other such annual readings, indicating that bullish bets have been scooped up at accelerated levels in recent months.
Elsewhere, short sellers reduced their bearish exposure by 33.7% over the last two reporting periods, and short interest now accounts for a low 1.2% of the stock's float. ARMH's failure to capitalize on this recent bout of buying pressure underlines the equity's inherent weakness.
Sector peer LSI has fared little better on the charts, with the stock falling more than 16% over the past 52 weeks. The equity continues to face technical headwinds against its 10- and 20-day moving averages -- two trendlines that have ushered the stock steadily lower since late March.
As with ARMH, sentiment surrounding the California-based company has remained fairly optimistic. Among covering analysts, no fewer than 10 out of 14 carry a "strong buy" suggestion on the stock. In fact, just one lonely dissenter has doled out a "sell" rating. Additionally, the average 12-month price target of $10.13 represents a brazen 66% premium to Tuesday's closing price of $6.09.
Additionally, despite being served dual price-target cuts Monday morning by Lazard and Friedman, Billings, & Ramsey, the new respective targets of $11 and $10 (bracketing the consensus estimate) reside in territory not visited by the stock on a daily closing basis since March 2006 and April 2007, respectively.
Fellow chipmaker NVDA has also endured its own set of struggles on the charts. The stock has backpedaled nearly 17% over the past 12 months. More recently, the equity has been roiling in the $12-$14 range. What's more, the $14 mark previously served as a foothold for NVDA, but since mid-April, has shown its face as a staunch technical ceiling.
Options players have turned a blind eye to the California-based company's technical woes, as well. For starters, the stock's 10-day ISE/CBOE/PHLX call/put volume ratio of 8.78 shows that 878 calls have been bought to open for every 100 puts in recent weeks. Plus, this ratio ranks higher than 94% of other similar readings taken in the past year, suggesting that bullish bets have been accumulated over bearish at a near annual-high clip.
Elsewhere, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.48 shows that call open interest more than doubles put open interest among options set to expire within the next three months. This ratio ranks in the 30th percentile of its annual range, implying that short-term speculators are more call-heavy than usual toward NVDA.
From a contrarian perspective, ARMH, LSI, and NVDA could all be poised to encounter headwinds in the near term. The high expectations surrounding these three low-performing equities sets up the perfect backdrop for the Expectational Analysis® approach to once again prove its merit. Should these three semiconductor stocks continue with their negative price action, a capitulation by the bulls could further exacerbate their technical woes.
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