IBM is a Dow component and they have posted declining sales for the last 17 consecutive quarters. While its business is improving the outlook is still negative.
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IBM - IBM Corporation - Company Profile
International Business Machines Corporation provides information technology (IT) products and services worldwide. The company's Global Technology Services segment provides IT infrastructure services, such as IT outsourcing, integrated technology, cloud, and technology support services. Its Global Business Services segment offers consulting and systems integration services for strategy and transformation, application innovation services, enterprise applications, and analytics; application management, maintenance, and support services; and processing platforms and business process outsourcing services. The company's Software segment provides middleware and operating systems software, including WebSphere software to integrate and manage business processes; information management software that enables clients to integrate, manage, and analyze data from various sources. The business was started in 1924.
This is not a bearish recommendation on IBM's business. This is a trading recommendation based on its chart pattern and the impact on the Dow. IBM has posted revenue declines for 17 consecutive quarters. The business format is changing and IBM is adapting. However, turning IBM around is like turning a VLCC tanker around. They carry 2 million barrels of oil and it takes miles to slow and turn because of their momentum.
IBM is making the turn and their cloud business is growing rapidly but it could take years before the restructuring is complete.
The problem for the market is that IBM is an expensive Dow component. At $160 per share it carries a lot of weight. After they reported earnings showing a big jump in cloud revenue and a major investment from Warren Buffett, the stock rallied to $163 where it stalled for the last two months. At Tuesday's close it was resting on support at $160 and as the Dow dropped to close at the low for the day.
The problem as I see it is this. There is no reason to buy IBM shares. They will post another revenue decline this quarter. That makes it a sell candidate for portfolio managers trying to raise cash for their end of year buys. It is also a high dollar stock so they get a lot of cash back when they sell it compared to selling a GE or a Pfizer. When you need to raise cash you sell the biggest stock with the least promising outlook.
The Dow is the weakest of the major indexes. If the market ever decides to correct over the next six weeks, you can bet the Dow will be the leader to the downside. That means IBM will likely be the leader inside the Dow because there is no real reason to own it when there are so many better stocks in rally mode.
I am recommending we buy the Oct $155 put with an IBM trade at $159. That will be below the support at $160 and potentially the start of a decline that could dip to $150 depending on the market.
With an IBM trade at $159
Buy Oct $155 put, currently $2.55, initial stop loss $162.50.