Why the Worst May Not Be Over for Twitter Inc (TWTR)

Twitter Inc (TWTR) has been falling to new record lows in 2016

Jan 20, 2016 at 12:44 PM
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So far, 2016 has not been kind to the stock market, with major equity indexes marking their worst yearly starts on record. Social media stocks haven't been exempt, with shares of Twitter Inc (NYSE:TWTR) hit particularly hard -- even after Nielsen N.V. (NYSE:NLSN) today announced plans to launch "social content ratings" based on user activity across TWTR and Facebook Inc (NASDAQ:FB).

Shares of the microblogging site have been slipping lower since an earnings-related sell-off in late April, and started 2016 on another steep decline, off 31% already year-to-date. In fact, the stock has only closed in the black once in the 11 days of trading completed so far this year, and yesterday's brief outage on Twitter's website and mobile platforms certainly didn't help. The trend has continued today, as TWTR was last seen down 4.3% at $15.97, after hitting yet another record low of $15.48 earlier.

While the security has been underperforming the S&P 500 Index (SPX) by more than 34 percentage points over the last three months, short sellers have been taking profits on their bearish bets. In fact, short interest on TWTR fell by more than 9% during the last two reporting periods -- though the resulting buying pressure hasn't been able to boost the stock.

Elsewhere, analysts remain skeptical of TWTR's prospects. Of the 24 brokerages following TWTR, 15 call it a "hold" or "sell."

Option traders, meanwhile, have been bullish. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), TWTR has a 50-day call/put volume ratio of 3.25 -- meaning more than three calls have been bought to open for each put during the last 50 trading days. Moreover, this ratio arrives in the 97th percentile of its annual range.

In fact, according to Trade-Alert, call open interest on TWTR jumped to a new record high as recently as last Friday, when there were 1.63 million of these contracts in residence. Post-expiration, that number has dropped precipitously to 820,294 contracts -- and if the stock continues to underperform, an unwinding of bullish sentiment among speculative players could drive Twitter Inc (NYSE:TWTR) shares to more new lows.

 

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