IBM: Cisco Joins The Bearish Outlook Party

 

When International Business Machines Corporation (NYSE: IBM) reported its earnings on July 17th, 2013 investors seemed to cheer, as you can see here. Shares spiked to just over $202, momentarily, in after hours trading.

 

Unfortunately, IBM did not hold on to those gains.

 

IBM is down close to 7 percent since those after-hours highs on July 17th 2013.The S&P 500 is up 3.2 percent in the same time period. Clearly IBM is starting to underperform the broader market.

 

Source: StockCharts.com

 

It does not inspire institutional investors, that own 56% of the outstanding shares, to continue holding on to a company that is now on a confirmed revenue slide. IBM recorded its 5th consecutive decline in revenue.

 

It is asking much for institutions to pound the table on any stock with such a negative revenue trend.

 

Typically, smart money will demand the inverse - at least consecutive quarter over quarter revenue and earnings expansion according toWilliam O'neil's method.

 

DOWNGRADES:

 

It seems to me that downgrades will be coming, en masse, once the share price starts reflecting that 'Big Blue' has left the $200+ price range.

 

The highest recent analyst price target forecast is from Topeka Capital Markets which has a price target of $246. The consensus price target is at $218.65. It is worth noting that Topeka Capital Markets madenews when their analyst slapped the first $1000 price target for Apple Inc. (AAPL) back in April 2012.

 

Even if this Wall Street downgrade and upgrade business, plus the price target adjustments by a few meaningless dollars, is seen as a joke by many it does move stocks - short term.

 

My feeling here is that as IBM departs further from the $200 scene, analysis will do what they do best and start lowering their 'price targets' and this will be another dark 'cloud' for IBM.

 

IBM continues to get some traction in the highly competitive cloud business as seen by this milestone government contract. The issue here, though, is that the cloud business is only a fraction of IBM's current revenue forecast.

 

Keep in mind that Goldman Sachs (NYSE: GS) downgraded IBM on July 9th, 2013 citing in part that IBM's upside is "more heavily dependent" on M&A, divestiture gains and non-operational items.

 

TECHNICALS:

 

Most investors are by nature mostly interested in a company's fundamental outlook. Once these fundamental analysis are satisfactory then real bets are made, with hard earned cash. These eventually builds a visual picture which is where technical analysis comes in.

 

My analysis on IBM started a few days back when I posted this short message with IBM trading at $191.49.

 

My analysis therefore is more like backward thinking. I was attracted to IBM's (downside) potential for technical reasons, which forced me to then look at the fundamental picture.

 

Source: StockCharts.com

 

1. The first material bearish crossover between the 10-week moving average and the 33-week moving average since early 2009.

 

2. A bearish, gray line, trend break going back to late 2008.

 

3. My primary price target for IBM, or 50 percent correction from the late 2008 lows to 2013 highs.

 

4. My aggressive price target for IBM, or 61.8 percent correction from the late 2008 lows to 2013 highs.

 

CONCLUSION:

 

I agree with Jim Cramer that IBM is a sell.

 

The writing is on the wall since there are fundamental and technical reasons to expect a strong push lower for IBM in the coming months.

 

With the S&P 500 retreating further and further from historic highs above 1,700, one wonders whether IBM's impending plunge will confirm that markets have ALREADY recorded major highs.

 

It seems the short selling sharks are circling IBM as they get ready to pounce.

 

To add color to the bearish IBM outlook, Cisco Systems, Inc. (NASDAQ: CSCO) also reported an earnings forecast that has not been taken well by investors.

 

Of course, the big IBM short position can also be argued as a bullish counter argument by those who would like to go long this name. A nice short squeeze can sometimes be the, ironic, magic that a stock in trouble just needs.