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Why Palm, Inc. Is Leading the S&P 500 Index, By the Numbers

Find out which stock is the best-performing issue on the SPX for 2009

by Elizabeth Harrow and Rocky White 1/29/2009 11:20 AM

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With the first month of 2009 drawing to a close, we decided to see how the year is shaping up for members of the S&P 500 Index (SPX). Specifically, we wondered, which SPX stock has collected the best year-to-date return? You might be surprised to hear that the broad-market index's top performing stock in 2009 is smartphone pioneer Palm, Inc. (PALM: sentiment, chart, options).

What makes Palm so great?

First, to clarify our criteria: we looked for active SPX members with a closing price above $5 and at least 1,000 puts and 1,000 calls in open interest. After filtering for these requirements, Advanced Medical Optics (EYE) actually arrived at the top of the roster -- but was instantly disqualified due to merger-and-acquisition developments.

After scrapping EYE, it was PALM that claimed the No. 1 spot. The stock has collected a whopping year-to-date gain of 155% so far in 2009, compared to a drop of 3.2% for the SPX. Looking back over the past 52 weeks, PALM is up 39%, while the SPX is down by 38%.

Price Change for PALM and SPX since January 2008

PALM recently retreated from resistance near the 8.50 region, but the pullback was contained by its rising 10-day moving average. This short-term trendline has underlined the equity's progress since early December.

Daily Chart of PALM since December 2008 With 10-Day Moving Average

While we're obviously impressed with PALM's technical performance in the new year, we decided to check out the stock's sentiment backdrop. Specifically, we're searching for signs of lingering pessimism on Wall Street, which would indicate to us that there are still some potential buyers on the sidelines. In other words, can the security find enough new investors to extend its recent rally?

Option players beat the rush

As it turns out, option traders have already taken notice of PALM's strength. The stock's Schaeffer's put/call open interest ratio (SOIR) has dropped consistently since September (in fact, the ratio began to decline even before the shares rebounded on the charts). PALM SOIR Now, the SOIR is docked at a modest 0.68. This reading suggests that short-term option players have been more bullishly aligned toward the equity just 20% of the time during the past year.

This is an optimistically skewed SOIR, for sure, but the ratio hasn't yet dropped to extreme levels. If the stock maintains its winning ways, there's still room for more bulls to jump on the bandwagon.

As evidence of this fact, buy-to-open call volume on PALM has steadily accelerated since the beginning of the year, outpacing comparable put volume. On the International Securities Exchange (ISE), traders have purchased roughly 70,000 calls and 40,000 puts in 2009. If speculative investors keep gravitating toward the stock's calls, it could translate to fresh buying pressure for PALM.

Year-to-Date ISE Buy-to-Open Call and Put Volume for PALM

Bears are still betting against the trend

Elsewhere, analysts and short sellers have taken the opposite tack, with both groups bearishly aligned toward the shares. Zacks reports 11 "hold" ratings and 2 "strong sells," compared to just 2 "strong buys." Any upgrades from this skeptical group could draw some new buyers to the table.

Price-target increases are also a possibility. The equity's average 12-month price target is $6.23, according to Thomson Financial, representing a discount of 20% to Wednesday's closing price. If any analysts decide to upwardly revise their estimates, it should support PALM's fledgling uptrend.

Finally, pessimistic investors have sold short a staggering 45.5% of the stock's available float. This massive accumulation of bearish bets represents a significant amount of sideline cash; as the shares continue to rise, the shorts will likely be pressured into repurchasing their losing bets at higher prices. A surge of short-covering support could help propel PALM up the charts.

Overall, outperforming PALM seems poised to extend its winning ways during the short term. As the remaining skeptics capitulate to the stock's rapid ascent, it should lend new buying power to the rally.

As always, please contact us with any questions, comments, or suggestions for future columns. For more commentary on today's market-moving news, please visit our Schaeffer's Daily Market Blog section throughout the trading day.

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Why Palm, Inc. Is Leading the S&P 500 Index, By the Numbers

Find out which stock is the best-performing issue on the SPX for 2009

by Elizabeth Harrow and Rocky White 1/29/2009 11:20 AM

PALM

SPX

EYE

stocks

options