Royal Caribbean Cruises Ltd. (RCL) stock is trading lower by more than 2% in Monday's pre-market session after the cruise liner reported a second quarter 2020 loss of $6.13 per share, much worse than the -$4.15 consensus. Revenues fell a gut-wrenching 93% year over year to $175.8 million, beating estimates by more than $17 million. The company warned that the "magnitude, duration, and speed of COVID-19 remains uncertain" and expects losses of "unknown magnitude" in the third quarter and fiscal year 2020.

Ket Takeaways

  • Royal Caribbean revenue fell 93% year over year.
  • Bottom fishers have been scooping up shares at a healthy pace.
  • Major resistance could limit gains in coming months.

Cruise ship stocks have entered holding patterns since June, hovering below major resistance levels generated by historic first quarter declines. Royal Caribbean has attracted greater bottom fishing than its peers during this period, with accumulation readings stabilized relatively close to the 2020 high. The company has now suspended operations through the end of October, but no one expects cruises to resume before 2021.

Wishful thinking is driving Wall Street consensus, with a "Moderate Buy" rating based upon seven "Buy," eight "Hold," and just two "Sell" recommendations, despite the potential for eventual bankruptcy. Price targets currently range from a low of $33 to a Street-high $85, while the stock will open Monday's session about $5 below the median $55 target. This placement suggests that Royal Caribbean stock is more than fully valued at this time, with the potential for further downgrades.

Bottom fishing refers to investing in assets that have experienced a decline due to intrinsic or extrinsic factors and are considered undervalued. A bottom fisher, a moniker given to investors who practice the bottom fishing strategy, speculates, using either technical or fundamental analytical techniques, that an asset's depressed price is temporary and will recover to become a profitable investment over time.

Royal Caribbean Long-Term Chart (2000 – 2020)

Long-term chart showing the share price performance of Royal Caribbean Cruises Ltd. (RCL)
TradingView.com

The stock entered a long-term downtrend after topping out at $58.88 in 2000, finally bottoming out at an all-time low near $5.00 following the 2008 economic collapse. It rallied within 10 points of resistance in 2011, ahead of a 2014 breakout and uptrend that posted solid gains into the 2016 high at $103.40. Buying pressure resumed with an April 2017 breakout that posted an all-time high at $135.65 in January 2018.

Three failed breakout attempts completed a long-term top that broke to the downside in February 2020, establishing strong resistance in the mid-$60s. It found support at the 2011 low in the upper teens in March and bounced back to resistance in June. That marked the highest high in the past two months, giving way to a modest decline that found support in the mid-$40s. The stock has been testing this level since late June, building a potential trading floor.

Royal Caribbean Short-Term Chart (2018 – 2020) 

Short-term chart showing the share price performance of Royal Caribbean Cruises Ltd. (RCL)
TradingView.com

The on-balance volume (OBV) accumulation-distribution indicator reveals healthy bottom fishing after the March low, lifting the indicator to an all-time high. However, OBV is less bullish than it looks at first glance because the majority of short sellers who poured into positions during the decline were forced to cover during the 300% ramp into June, skewing accumulation readings. Even so, many folks are now bullish on the sector, despite considerable risks.

The first quarter decline also failed the 2014 breakout above the 2000 high in the upper $50s, as well at the 200-month exponential moving average (EMA). In turn, this bearish action establishes a zone of heavy resistance that now stretches from $58 into the low $70s. Mounting this formidable barrier will require bullish catalysts, but that may not be in the cards, even with a commercial vaccine, because bearish sentiment will keep many folks off these popular venues long after the pandemic runs its course.

Market sentiment refers to the overall attitude of investors toward a particular security or financial market. It is the feeling or tone of a market, or its crowd psychology, as revealed through the activity and price movement of the securities traded in that market. In broad terms, rising prices indicate bullish market sentiment, while falling prices indicate bearish market sentiment.

The Bottom Line

Royal Caribbean Cruises stock is losing ground after the company reported a 93% year-over-year revenue decline, but a breakdown through the mid-$40s isn't likely at this time.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.