Rough Waters Could Be Ahead for Royal Caribbean Cruises Stock

Short sellers are starting to turn up the heat on RCL stock

by Research Dept.

Published on Jun 12, 2018 at 9:29 AM
Updated on Jun 24, 2020 at 10:16 AM

Royal Caribbean Cruises Ltd (NYSE:RCL) stock encountered some rough waters last week. A bearish note on the sector from brokerage firm Morgan Stanley sent RCL and its peers reeling, and shares of the cruise operator tagged a new 52-week low of $101.20 in response. From a broader perspective, the stock has shed more than 13% so far in 2018, and is now trading at its lowest levels since its April 2017 earnings-induced bull gap. With resistance looming overhead from its 20-day and 40-day moving averages, as well as its 10% year-to-date loss level around $107.35, RCL looks poised for more short-term losses.

rcl daily price chart june 8

 

Short interest remains surprisingly thin on the underperformer, after falling to a multi-year low less than a year ago. The 3.84 million RCL shares currently sold short account for just 1.8% of the equity's float. However, a 5.1% increase in short interest during the latest reporting period indicates that bears are beginning to target RCL once again. A continued rise in short-selling activity could provide stiff headwinds in the short term.

Elsewhere, options traders are call-heavy. RCL sports a Schaeffer's put/call open interest ratio (SOIR) of 0.51, with calls almost doubling puts among options set to expire within three months. And during the past 10 days, traders have bought to open 2.39 calls for every put on RCL, according to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). That ratio registers in the 96th percentile of its annual range, which means speculators have rarely shown a greater preference for bullish bets over bearish on RCL. As such, the leisure name is vulnerable to a shift in sentiment as the price action continues to disappoint.

There's room for downgrades to push the struggling cruise stock lower, too. Eleven brokerage firms call RCL a "strong buy," compared to only four "holds" and zero "sells." A round of bearish notes could draw additional sellers out of the woodwork, as evidenced by the stock's dismal response to Morgan Stanley's downwardly revised earnings estimates.

Plus, now is an ideal time to buy RCL options premium. Schaeffer's Volatility Index (SVI) of 25% arrives in the low 19th annual percentile, as short-term bets have rarely priced in lower volatility expectations.

Subscribers to Schaeffer's Weekend Trader Series options recommendation service received this RCL commentary on Sunday night, along with a detailed options trade recommendation -- including complete entry and exit parameters. Learn more about why Weekend Trader is one of our most popular options trading services.


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