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Schaeffer's Street Chatter Highlights the Following Stocks: IBM.

CINCINNATI -- Today's "Street Chatter" from Schaeffer's Investment Research focuses on: IBM (NYSE:IBM). "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 email every day click on the following link: http://www.schaeffersresearch.com/redirect.aspx?CODE=PRSC12M&PAGE=1

Street Chatter:

IBM

Our final stock of the day is the piece de resistance, as we get a chance to look at a stock ahead of its earnings report. Software and enterprise server guru IBM (NYSE: IBM) is slated to slip into the earnings confessional after the market close tonight. Currently, the Street is expecting a profit of $1.05 per share from the firm, a 23-percent increase over the same period last year. Furthermore, IBM has bested these expectations by an average of five percent during the previous four reporting periods. Checking in with Whispernumber.com, IBM has earned a lowly "whisper number," a derivation of the average of individual investor expectations, of $1.02 per share, hinting that expectations might be a bit on the low side heading into tonight's report.

While this appears on the surface to be the prime setup for a bullish play on IBM, I want to point out the situation that unfolded the last time that the company reported earnings. At that time, analysts were expecting a profit of $1.94 per share from IBM, with a "whisper number" of $1.96. While a match or miss could have elicited a sharp decline in the stock, a profit of $2.11 per share should have prompted a nice rally on the news. However, IBM went on to continue to grind slowly lower during the ensuing 30-day period, shedding nearly four percent. I pass this information along to indicate that you can't always just take the indicators at face value.

Moving on, the technical picture for IBM is not a pretty one by any means. The shares have endured a rocky road during the past several months, battling their 10-month and 20-month moving averages in the process for every inch of higher ground. IBM is currently at a rather precarious juncture, as it faces a triple threat at the 85 level. Not only is this level notorious for its technical resistance, but it is also home to peak call open interest for the front three months of options. As regular readers know, heavy call strikes can often exert resistance to a stock, especially heading into options expiration. The third wall levied against IBM is its 20-month moving average, which has taken up residence at the 85 level. In fact, IBM has only closed one month above this trendline since March 2005.

Quick Facts on IBM

--Percent of analysts tracked by Zacks who rate the stock with a "buy": 78%

--Number of analysts tracked by Zacks: 18

--Short interest as a percent of float: 0.46%

--Short-interest ratio: 1.46

--Schaeffer's put/call open interest ratio (SOIR): 0.63

--SOIR percent rank: 44%

--Overall Schaeffer's Equity Scorecard rating: 4.0

Checking in on IBM's sentiment indicators, I find making any kind of bullish call on the shares rather difficult. With 78 percent of analysts rating IBM a "buy" or better, short interest resting near a four-year low, and options players apparently betting on an upside move in the shares, things seem to be stacked rather firmly against IBM.

While I would like to see a bit more optimism levied against the share heading into earnings, I can make do with what I'm dealt. If you've followed along to this point, you have probably figured out that I am leaning toward a put on IBM ahead of tonight's report. Right now, the May or July 85 puts both look rather attractive and primed for a nice gain on a negative reaction to tonight's earnings report. If you are a considerably more daring investor, you might try your hand at an April 85 or 80 put to see if you can turn a quick triple-digit profit. However, with the "whisper number" indicating that at least some investors have lowered expectations, the latter play may be a bit more of a liability than a risk.

Keep in mind that playing options is far from an exact science, and that any of these positions could garner a heavy loss for said investor. However, with the leverage of options on your side, you stand to make much more than your potential losses. As always, use sound judgment when entering any trade, and set your stop loss where you feel most comfortable. Until next time, good luck trading!

Click the following link to see a Monthly chart of IBM since February 2005 with 10-month and 20-month 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 email 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.
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Date:Apr 18, 2006
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