Adobe (ADBE) stock outperforms a stellar software sector

While not the most likely sector to stage a rally during a recession, software stocks have quietly trekked higher in 2009. Specifically, the Software HOLDRS Trust (NYSE: SWH) has gained more than 29% on a year-to-date basis, compared to the S&P 500 Index's (SPX) gain of about 13.5% for the same time frame. What's more, the exchange-traded fund's (ETF) rally still maintains support at its 10-week moving average, which has ushered SWH higher since late March.

From a sentiment perspective, investors are considerably pessimistic despite the sector's strong price action. For instance, SWH's Schaeffer's put/call open interest ratio sits at 2.62, which is higher than 77% of those taken during the past year. In other words, options players have been more bearishly aligned toward the sector only 23% of the time during the past year. Meanwhile, Zacks data shows that only 47% of the 875 analyst rankings for the software sector come in at a "buy," while nearly 6% sit at a "sell." This configuration leaves ample room for potential upgrades, which could help to buoy the group.

Within the software sector, Adobe Systems Inc. (NASDAQ: ADBE) has emerged as an outperformer. The equity has rallied more than 53% so far in 2009, putting SWH's 28% year-to-date advance to shame. What's more, ADBE has skipped higher along the support of its 10-week and 20-week moving averages since mid-March. Recently, the shares entered a trading range between long-term resistance in the 35 area, the site of support and resistance in October 2008, and support at the 32 level, home to a 50% retracement of ADBE's October 2007 high and its February low.



Despite the stock's strong price action, investors are trying to call a top to ADBE's uptrend. For instance, the security's SOIR of 1.10 indicates that puts easily outnumber calls among near-term options. This ratio also falls just seven percentage points shy of an annual peak, underscoring the heavy-handed bearish sentiment among options traders.

Data from the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) also reveals a grim outlook from options traders. Specifically, ADBE's 10-day ISE/CBOE put/call volume ratio of 1.49 reveals that puts bought to open have outpaced calls purchased on these exchanges during the prior two weeks. Furthermore, the current reading also ranks above 67% of all those taken during the past year.

The brokerage bunch is also betting against this software firm. Specifically, the equity has garnered just eight "buy" ratings, compared to 10 "holds." Furthermore, Thomson Reuters reports that the consensus 12-month price target for ADBE rests at $31.13 per share, a discount to the stock's Monday close at $32.73 per share.

Fundamentally, ADBE is scheduled to release its quarterly earnings report after the close of trading on Tuesday, Sept. 15. Wall Street is expecting the company to report a profit of 34 cents per share, down from last year's profit of 42 cents per share. Historically, the company has matched expectations twice and beaten the consensus estimate twice during the prior four reporting periods.

If the company can top expectations this time around, we could see ADBE shares rally sharply as a result. Not only will a move above key overhead resistance at the 35 level be a technical signal that the shares are poised to extend their run higher, but solid quarterly results could finally convince the masses of bearish investors to capitulate to the stock's uptrend, thus providing additional buying pressure for ADBE.