At Schaeffer's Investment Research, we employ a 3- tiered analysis approach
known as Expectational Analysis® (EA) that was created more than 2 decades ago.
EA utilizes traditional methods of fundamental and technical analysis and
combines these with a third, crucial look at investor sentiment. It is this
third layer of analysis that provides a critical edge in selecting stock and
option plays. Both anecdotal and quantifiable measures of investor sentiment
provide a window into how the investing crowd perceives reality. These
perceptions serve as powerful contrarian indicators, as the crowd tends to move
as a herd and is, to paraphrase the venerable contrarian Humphrey Neill, "right
during the trend but wrong at both ends." A look into the psyche of the
collective investing masses, while also taking into account important technical
and fundamental variables, can offer a reliable recipe for trading success.
The latest opportunity found by the EA methodology is Incyte (INCY). According
to Hoover's, Incyte is a biotechnology company focused on discovering and
developing drugs that inhibit specific enzymes associated with cancer, diabetes,
and inflammatory diseases, including rheumatoid arthritis, multiple sclerosis,
and asthma. The company has several products in the discovery stage, including a
CCR5 antagonist, designed to prevent the entry of HIV into target cells.
Furthermore, INCY has teamed with Pfizer to develop therapies for chronic
inflammatory conditions and on the development, manufacture, and marketing
rights of drugs to treat rheumatoid arthritis and insulinresistant obese
patients.
On January 8, the company presented positive preliminary results obtained from
an ongoing Phase IIa placebo-controlled dose-ranging trial with its lead oral
JAK inhibitor, which is intended for rheumatoid arthritis. INCY reported that
despite the short duration of this study, it has seen improvements in 6
different measures of glucose control and cardiovascular risk.
Technically speaking, the shares have been in a steady uptrend since August,
gaining more than 160% as they rally along the support of their ascending
10-week and 20-week moving averages. What's more, the security proved to be
immune to much of the weakness that plagued the market at the start of 2008.
As followers of the EA method, we ideally like to see solid price action persist
against a backdrop of skepticism, as this implies that there could be additional
money waiting on the sidelines that hasn't yet been committed to the bullish
cause. It seems as though there is plenty of room on the bullish INCY bandwagon.
Options players have leveled some heavy bearish bets against the stock in an
attempt to call a top to its uptrend. The Schaeffer's put/call open interest
ratio for INCY stands at 1.22, as put open interest easily outweighs call open
interest among nearterm options. This reading is also higher than 88% of those
taken during the past year. In other words, short-term options speculators have
been more bearishly aligned against the shares only 12% of the time during the
prior 12 months.
Short sellers have also loaded up on the pessimistic positions when it comes to
this trendy retailer. In January, the number of INCY shares sold short increased
by almost 12% to nearly 11 million shares. This hefty buildup of bearish bets
accounts for 13% of the company's float and is almost 6 times the stock's
average daily trading volume. As investors unwind their bearish bets and jump on
the stock's bandwagon, they will help to push the security even higher.
