The new highs in the S&P 500 (SPX) has breathed new life in some long beleaguered large components like IBM. The stock is now up about 16.5% on the year, and up a whopping 37% from its February lows, which also matched a 6 year low:
Despite the sharp bounce, the stock looks to be at a possible inflection point. Technicians might see the $160 level as the neckline of an inverse head and shoulders pattern (bullish):
I used the term inflection point, because it could go either way. The company is set to report Q2 earnings on July 18th after the close. The options market is implying about a 4.25% one day post earnings move, which is light to the 4 qtr average one day post earnings move of 5.5% (all lower). The stock’s recent run could discount some or any good news (assuming there is any).
Which brings me to some unusual options activity yesterday in the name. When IBM was $160 in the afternoon, there was an opening buyer of 4,000 Aug 170 calls paying 66 cents, these calls break-even: at 170.66, up 6.6% from the trading level. These calls appear to be dollar cheap, but not exactly a great way to play for a move back to the 52 week highs over the next month, if in fact that was the intent of the trade. (offering our usual disclaimer, we don’t pretend to infer any directional bias by identifying this trade, merely food for thought).
I can see the bullish case for IBM off of the 2016 lows, given unusually high negative sentiment, high dividend yield (currently 3.5%) with the hope of some sort of corporate action not too dissimilar to Meg Whitman’s split of Hewlett Packard. But the headwinds to a turnaround remain prevalent, with nearly 55% of their sales from outside the U.S. weak enterprise spending environment and reliance on legacy tech for the majority of their sales.
We will be sure to take a closer look prior to earnings and preview potential trades.