Schaeffer's Street Chatter Highlights the Following Stocks: Merrill Lynch and Johnson & Johnson.

CINCINNATI -- Today's "Street Chatter" from Schaeffer's Investment Research focuses on Merrill Lynch (NYSE:MER) and Johnson & Johnson (NYSE:JNJ). "Street Chatter" is a report that analyzes three newsworthy stocks that are generating a lot of attention on Internet message boards. "Street Chatter" is published on www.SchaeffersResearch.com - the home of Bernie Schaeffer and Schaeffer's Investment Research.

For additional information about this report, or to have it delivered to you free via e-mail every day click on the following link: http://www.schaeffersresearch.com/redirect.aspx?CODE=PRSC12M&PAGE=1 .

Street Chatter:

Merrill Lynch

We are set for another slew of earnings reports in today's edition of "Street Chatter." Our lead company of the day, Merrill Lynch (NYSE:MER), posted a record $8 billion in quarterly revenue during the first quarter. Earnings for the period arrived at $475 million, or 44 cents per share, compared with expectations for a profit of 32 cents per share.

The shares have reacted with a slight bias to the upside on the news, and MER was last seen higher by nearly 0.5 percent. Today's earnings report aside, the stock has been quite a stellar performer, trading near all-time highs and rallying more than 51 percent along the support of its 10-week and 20-week moving averages since May 2005. Furthermore, the AMEX Securities Broker/Dealer Index (XBD), of which MER is a card-carrying member, has easily outpaced the S&P 500 Index on a weekly relative-strength basis since April 2005.

Quick Facts on MER

-- Percent of analysts tracked by Zacks who rate the stock with a "buy": 67%

-- Number of analysts tracked by Zacks: 12

-- Short interest as a percent of float: 1.49%

-- Short-interest ratio: 2.90

-- Schaeffer's put/call open interest ratio (SOIR): 1.30

-- SOIR percent rank: 98%

-- Overall Schaeffer's Equity Scorecard rating: 8.0

So, we know that MER is fundamentally and technically sound, but what about the sentiment outlook? Well, despite the speckling of red highlights above, there is still room to squeeze some more money out of the sidelines for the security. Analysts clearly have very little room for improvement and this could be a concern, while short interest is practically nonexistent. However, there is still hope for the shares in the options outlook. Taking a look at MER's SOIR, it is clear that many speculative players are betting on a decline in the shares. Furthermore, this pessimism is rising in the group, and a glance at a graph of the stock's SOIR compared against its daily price action indicates that MER tends to trend in the direction of this ratio. With bearish sentiment still on the rise in the options pits, we could still see continued upside from the security.

So, it's pick time for MER. I'm not too crazy about a sudden upside surge for MER, and that is the type of movement I like to see in the cards when playing options. Luckily, these trading vehicles are so versatile that you can do almost anything with them. In MER's case, I find myself eyeing a put-sell position at the 70 strike in the May or July series of options. While I don't believe that MER will decline, I'm also not that confident that it will return the kind of profit on an outright call-buy position that I usually look for. By entering a put-sell on the stock, I can pocket the initial premium, while still making a neutral-to-bullish bet on the shares.

Click the following link to see a Weekly chart of Merrill Lynch since May 2005 with 10-week and 20-week moving averages: http://www.schaeffersresearch.com/wire?ID=15813 .

Johnson & Johnson

Johnson & Johnson (NYSE:JNJ) is also in the earnings spotlight today after reporting first-quarter earnings of $3.31 billion, or $1.10 per share. Excluding items, JNJ pocketed $3 billion, or 99 cents per share, eking past the Street's estimate by a penny per share. Sales rose 1.2 percent in the latest three months to $12.99 billion from $12.83 billion in the same period a year earlier.

Like MER, JNJ is also receiving a bit of a muted reaction to earnings today. At last check, the shares were up slightly less than 0.5 percent. However, with JNJ in a long-term downtrend, I find this development considerably more concerning. The 58 level had been acting as a level of intermediate-term support for the shares, but JNJ recently gave up that comfort zone. Now the stock is not only contending with resistance in this region, but it is also struggling with its 10-week and 20-week moving averages. In fact, JNJ has closed only a handful of weeks above this duo since April 2005.

Quick Facts on JNJ:

-- Percent of analysts tracked by Zacks who rate the stock with a "buy": 53%

-- Number of analysts tracked by Zacks: 19

-- Short interest as a percent of float: 0.34%

-- Short-interest ratio: 1.21

-- Schaeffer's put/call open interest ratio (SOIR): 0.71

-- SOIR percent rank: 19%

-- Overall Schaeffer's Equity Scorecard rating: 2.0

So, we've got mediocre fundamentals and abysmal technical performance. But, if you were looking for some hope in the sentiment picture, you will be sorely disappointed. Analyst activity is rather complacent, short interest is far from supportive, and options players are overly bullish on the shares. This last point is just as important to JNJ as it is to MER. Looking at a graph of the stock's SOIR compared to its daily price action reveals much the same information as MER, except that the trend is to the downside. With optimism continuing to grow on JNJ, and the stock's tendency to move in the same direction, I would be more than hesitant to take any bullish position on the stock at this point.

With a clearly poor outlook for JNJ, given that its Schaeffer's Equity Scorecard rating falls at a 2.0 out of 10, I think that a put is in order for the stock at this point. Personally, I like the July or October 60 put at this point, especially with April options expiring at the end of the week. If you would like a more aggressive play, check out the May or July 55 put.

Click the following link to see a Weekly chart of Johnson & Johnson since April 2005 with 10-week and 20-week moving averages: http://www.schaeffersresearch.com/wire?ID=15813 .

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 e-mail every day. http://www.schaeffersresearch.com/redirect.aspx?CODE=PRSC12M&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 .