Schaeffer's Midday Options Update Features Microsoft.

CINCINNATI -- Today's Schaeffer's Midday Options Update features Microsoft (NASDAQ:MSFT). The Midday Options Update contains a brief commentary on the day's most notable activity and a table listing the most-active calls and puts for the day. The Midday Options Update is published every day at www.SchaeffersResearch.com - the home of Bernie Schaeffer and Schaeffer's Investment Research.

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Options Update: Microsoft in Technical Trouble

A daily feature available on SchaeffersResearch.com is "Options Update." Every day, we'll give a brief market overview and focus on one stock that is the center of some heavy option trading. The focus of today's feature is Microsoft.

The Commerce Department said today that U.S. retail sales rose 1.4 percent in July, moving at their fastest pace in six months and topping the consensus view by half a percentage point. The reading was driven by higher sales of autos and gasoline. Excluding automobiles, sales increased one percent (auto sales surged 3.1 percent during the month). Excluding both autos and gas, sales rose 0.7 percent, the best increase since January. Gasoline sales rose 2.5 percent during the month thanks to inflated prices.

Business inventories, meanwhile, rose by 0.8 percent to a seasonally adjusted $1.339 trillion, outpacing the Street estimate for a 0.6-percent rise. May's reading was adjusted higher to reflect a gain of 1.1 percent. Business sales, meanwhile, inched higher by only 0.2 percent to $1.062 trillion, taking the inventory-to-sales ratio to 1.26 in June from 1.25.

Most-Active Options Update

At 3:05 p.m. Eastern Time, the Dow Jones Industrial Average (DJIA - 11,063.2) has shed 0.55 percent. The S&P 500 Index (SPX - 1,264.28) has lost 0.59 percent, and the Nasdaq Composite (COMP - 2,053.9) has declined 0.86 percent. At 3:05 p.m. Eastern Time, 2,400,341 calls have changed hands compared to 1,945,447 puts, equaling a single-day put/call volume ratio of 0.81. The CBOE's equity put/call volume ratio stands at 0.83, while the ISE's ratio comes in at 0.87.

Microsoft

Microsoft (NASDAQ:MSFT) is my final featured stock this week. The August 25 call (MSQ HJ) was popular in the options pits today, trading 9,604 contracts on rather substantial open interest of 174,267 contracts before the bell rang.

From a technical perspective, something rather interesting is happening on MSFT's charts, and I wonder how many other people have noticed. The stock hit an all-time high in December 1999 at $59.96. It just so happens that December 1999 is 80 months ago, big news if you happen to be looking at the 80-month moving average. After the millennium, MSFT fell abruptly, and that decline is hitting the 80-month trendline right now, because those all-time high readings are slipping over the horizon.

There were still enough buyers to keep the stock's price above $50 until March 2000, but after that, MSFT fell faster than a server off a cliff. You can see the effect in the 80-month trendline, which has rolled over and is now bearing down menacingly. We have to acknowledge that MSFT has support from its 160-month moving average, but that is rising slowly, whereas the 80-month is accelerating hard. The stock has not closed a month above this trendline since November 2002, and it has not even touched it since September of the following year. Next time there's contact, it will be interesting to see what happens.

Turning to the sentiment, short sellers increased their bearish bets in July by almost 20 percent, yet still only one percent of the stock's float is sold short, offering little fuel for a short-covering rally. According to Zacks, nine of the 17 analysts covering MSFT rate the shares a "strong buy" and three more see it as a "buy," so there is a risk of downgrades. When that many people are shouting "buy" and the stock is languishing, there's probably something to worry about.

The Schaeffer's put/call open interest ratio (SOIR) for MSFT is 0.34, which tells us that calls are almost three times as popular as puts in the front three months of options. What's more, today's SOIR is lower than 67 percent of the readings taken during the past year. In other words, it's optimistic, which suggests that money probably isn't waiting on the sidelines. By and large, portfolios are already chock full o' MSFT, suggesting buying power is limited.

On our Schaeffer's Equity Scorecard, the stock scores 4.0 out of 10, suggesting that the next move probably won't be to the upside.

Click here to see a Monthly chart of Microsoft since March 1997 with 80-month and 160-month moving averages: http://www.schaeffersresearch.com/wire?ID=17120 .

The best way to take advantage of the timely Schaeffer commentaries is to sign up to receive their free e-newsletters -- Opening View, Market Recap and Monday Morning Outlook. Click here to have the Schaeffer's commentaries delivered to you free via email every day. http://www.schaeffersresearch.com/redirect.aspx?CODE=PRMOU13M&PAGE=1 .

About Schaeffer's Investment Research (www.SchaeffersResearch.com)

Schaeffer's Investment Research, founded by Bernie Schaeffer in 1981, is a financial information and trading resources company. It publishes Bernie Schaeffer's Option Advisor, the nation's leading options subscription newsletter. The firm's contrarian approach focuses on stocks with technical and fundamental trends that run counter to investor expectations. The firm's website, http://www.SchaeffersResearch.com , is recognized as one of the leading information sources for stock and options traders and was cited as the top options website by both Forbes and Barron's. Click here for more details about Schaeffer's trading methodology: http://www.SchaeffersResearch.com/method .