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Sizing Up Bullish Speculation on STEC, Inc., By the Numbers

Calls are flying across the tape at a fast and furious pace as buyout rumors swirl

by 1/14/2010 2:10:23 PM
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STEC, Inc. (STEC: View sentiment for STECsentiment, chart, options) has been attracting a lot of attention from call traders lately, thanks to speculation that IBM (IBM) might soon launch a buyout bid for the company. Not only that, the stock is also a favorite target of short sellers. With STEC suddenly stealing the spotlight on Wall Street, we decided to take a closer look at this small-cap semiconductor stock.

Sizing up the price action

Compared to the wildly volatile shares of STEC, the S&P 500 Index (SPX) looks downright comatose. Shares of the tech stock rallied sharply during the first nine months of 2009, before tumbling back down to earth. Currently, STEC sports a 52-week gain of about 327%, compared to a climb of just 32% for the SPX.

12-Month Price Change for STEC and SPX

As evidence of the equity's tendency for stomach-churning price swings, consider this: STEC's 20-day relative-strength reading versus the SPX arrives at 157.3%, while its 60-day relative-strength reading stands at 76.6%. In other words, STEC's tendency has been to drastically outperform or substantially underperform the broader equities market. Never a dull moment, it seems...

In recent sessions, STEC has climbed the charts amid growing speculation that a buyout offer will materialize. However, the stock's progress has been halted at the round-number $20 level, which roughly corresponds with STEC's perch prior to its bearish gap in early November. Having filled in this gap, the shares now appear to be resuming their previous slump.

Daily Chart of STEC since July 2009

So, despite the stock's recent merger-and-acquisition related gains, it seems that there are still some serious technical obstacles blocking STEC's path higher.STEC price chart In fact, resistance from the security's 10-month moving average is also lingering in the low 20s, and this trendline could easily cap any potential breach of the $20 level.

Needless to say, we have some serious reservations about STEC's technical prospects. Our anxiety level is ratcheted even higher by the recent onslaught of buy-to-open call volume, since it seems to indicate that expectations are running rather high for this volatile little stock. However, with short interest representing such a substantial portion of STEC's float, we had to wonder whether the uptick in call buying was simply the result of increased hedging activity by the shorts.

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