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Schaeffer's Midday Options Update Features Apple Computer, IBM, Intel, Yahoo!, and Dell

Posted on: Wednesday, 18 January 2006, 15:00 CST

Today's Schaeffer's Midday Options Update features Apple Computer (NASDAQ:AAPL), IBM (NYSE:IBM), Intel (NASDAQ:INTC), Yahoo! (NASDAQ:YHOO), and Dell (NASDAQ:DELL). 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. 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=PRMOU12M&PAGE=1 .

Options Update: Stock Tips on Apple Computer

The major market indices are diving deeper into negative territory today after a pair of disappointing fourth-quarter earnings reports out of Intel (INTC) and Yahoo! (YHOO) ignited concern that this earnings season might not live to up to expectations.

Bad Intel

As mentioned above, Intel (NASDAQ:INTC) is weighing heavily on the market today, as the stock is trading at its lowest level in two months. The firm's earnings report after the close last night is solely responsible for this plunge in the shares. The company's fourth-quarter profit increased 16 percent, but its sales came in below expectations thanks to weaker prices and low shipments of desktop-computer chips. INTC's sales increased to $10.2 billion, lower than its forecast range of $10.4 billion to $10.6 billion. Thanks to this news, Citigroup downgraded INTC to "hold" from "buy," UBS cut INTC to "neutral" from "buy," and Piper Jaffray downgraded the company to "market perform" from "outperform."

YaWho?

Contributing to the lopsided weakness in the technology sector, Yahoo! (NASDAQ:YHOO) posted a fourth-quarter profit of 16 cents per share excluding items. The Street expected earnings of 17 cents per share. Net revenue for the firm came in at $1.068 billion, which falls in line with estimates. Looking ahead, YHOO expects sales between $1.04 billion and $1.1 billion, in line with analysts' expectations. Unfortunately, the company's profit outlook fell short of expectations. YHOO expects to earn between $410 million and $440 million in the first quarter, short of the $475 million expected by some analysts. For the full fiscal year, YHOO forecast earnings between $1.915 billion and $2.055 billion, compared to forecasts of $2.12 billion.

Big Blues

IBM (NYSE:IBM) also slipped into the earnings confessional last night. IBM reported a fourth-quarter profit of $3.19 billion, or $1.99 per share, which arrived 13-percent higher than last year's profit of $2.8 billion, or $1.67 per share. Income from continuing operations totaled $3.22 billion, or $2.01 per share, including a 10-cent charge for pension plans. By this measure, IBM slipped past the Street's earnings estimate of $1.94 per share, however, revenue for the quarter totaled $24.4 billion, arriving well below expectations of $25.4 billion.

Most-Active Options Update

At 1:39 p.m. eastern time, the Dow Jones Industrial Average (DJIA - 10,821.7) has dropped 0.68 percent. The S&P 500 Index (SPX - 1,272.47) is 0.82 percent lower, and the Nasdaq Composite (COMP - 2,272.2) has plunged 1.32 percent lower. At 1:40 p.m. Eastern time, 3,158,961 calls have changed hands compared to 2,786,124 puts, equaling a single-day put/call volume ratio of 0.88. The CBOE's equity put/call volume ratio weighed in at 0.86.

Apple Computer

It's been quite a week for up-and-coming iPod producer Apple Computer (NASDAQ:AAPL). Not only is the stock up nearly nine percent since December 9, but the company has apparently managed to overtake Dell (NASDAQ:DELL) in market capitalization due to its 12-percent surge between December 10 and December 13. Due to the move, AAPL's market capitalization rose to $72.13 billion, passing DELL's value of $71.97 billion. According to a Dow Jones Newswire article citing Appleinsider.com, this changing of the guard prompted a bit of mirth from AAPL CEO Steve Jobs. On Friday, Mr. Jobs sent an e-mail message to employees, which read: "Team, it turned out that Michael Dell wasn't perfect at predicting the future. Based on today's stock market close, Apple is worth more than Dell. Stocks go up and down, and things may be different tomorrow, but I thought it was worth a moment of reflection today. Steve."

Technically speaking, AAPL has put in a steady performance since July, advancing along its 10-week and 20-week moving averages. The equity has even outperformed the broader market, as represented by the SPX, on a relative-strength basis since June.

But is all this outperformance going to investors' heads, and thus negatively impacting AAPL's sentiment reading? Two of our indicators would say yes. The stock has certainly garnered favor in the financial media, with articles like a recent piece in Barron's titled "More Polish Likely for Apple," and the extensive coverage of the company siding with INTC in its new wave of Mac computers. From our contrarian point of view, this type of bullish attention is to be expected on an outperformer like AAPL, but a glut of this attention could set expectations too high and begin to negatively impact the shares.

The other indicator to keep an eye on is AAPL's short-interest picture. Short interest has declined steadily for the past several months, dropping more than 25 percent since January 2005. What's more, the number of AAPL shares sold short skipped 15-percent lower during December. The resulting short-interest ratio (or number of days it would take to buy back the 24.8 million AAPL shares sold short) of 1.00 leaves indicates that there is very little pessimism levied against the shares and decreases the chances of AAPL benefiting from short-covering support in the event of a pullback.

Moving on to our other indicators, I find some rather encouraging data for the AAPL bulls out there. The stock's current Schaeffer's put/call open interest ratio (SOIR) of 1.03 indicates that puts outnumber calls in the front three months of options, while ranking above 94 percent of all SOIR readings taken during the past year. In other words, short-term options players have only been more bearish toward AAPL six percent of the time during the past 52 weeks.

However, today's influx of call activity could help throw this indicator into question. So far, more than 24,000 of these bullishly oriented investment vehicles have changed hands at AAPL's January 85 strike. Open interest for this front-month option currently numbers 41,891 contracts, so we will have to wait until tomorrow to see if any of today's activity will translate in to new open interest. The reason that I say that this activity could be a pain for AAPL is that the stock tends to trend in the direction of its SOIR. A downturn in this ratio, which could be brought about by increased call activity, could be the precursor to a pullback in the shares.

Despite the plethora of hype flowing from the financial media, analysts seem to be inoculated against this bullish AAPL bug sweeping the Street. In fact, Zacks reports that 10 of the 18 covering brokerage firms rate the shares a "hold." Naturally, if this bunch of holdouts changes its tune to a more bullish pace, it could definitely be beneficial for AAPL.

Summing up this wealth of data on AAPL, I still find it hard to be extremely bullish on the shares. I don't doubt that the path of least resistance for the stock remains to the upside, as evidenced by our Schaeffer's Equity Scorecard rating of 7.0 out of 10. I guess I am just looking for a bit more encompassing bearish sentiment from the crowd. Personally, I'd look for a pullback to the 80 level and a bit more sideways motion for the time being. Just remember to be on the lookout for that big upside move that is sure to arrive when those new Macs hit the shelves.

Click the following link to see a SOIR Chart for PFE since January 2005 and a Weekly Chart of AAPL Since July 2005 With 10-Week and 20-Week Moving Averages: http://www.schaeffersresearch.com/wire?ID=15023 .

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=PRMOU12M&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 .

Source: Business Wire

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