Pro Traders: IBM Earnings To Set Tone For Weeks?

Not only will IBM earnings out Monday set the tone for Tuesday’s trade – but they could set the tone for the next 5 weeks.

At least that's what a research note from Bespoke would suggest.

As you may know IBM reported after the bell - but what you might not know is that IBM's one-day post earnings direction is same as S&P’s direction over next 5 weeks 80% of the time, according to Bespoke.

In other words if we see a gain in IBM on Tuesday we should see a gain in the S&P 500 over the next 5 weeks, explains host Melissa Lee.

You can see the correlation in the chart below.

What must you know about this potentially critical profit report?

IBM

Shares of IBM sold off in extended trade, despite a higher-than-expected profit.

According to CNBC’s Bob Pisani the issues were: 2010 guidance of "at least" $11.40 is only slightly better than previous guidance of "at least" $11.25; bookings were also light at $11 billion vs. street expectations of $12.5 billion.

However, it’s also important to remember that the stock has had an incredible run (see the chart below) and some investors may just be booking profits.

By the numbers the technology giant said it earned $2.82 a share in the third quarter, against $2.40 a share in the same period last year.

Revenue for the quarter was reported at $24.27 billion, versus $23.56 billion last year.

Equity analysts who follow IBM expected the company to turn in a profit of $2.75 a share on sales of $24.13 billion, according to Thomson Reuters.

How should you position?

I think their business model is very sound and nothing in these numbers disappoints me, says Tim Seymour. I think the stock pulled back because it was priced to perfection – hence the sell-off.

I don’t agree that the stock was priced for perfection, counters Karen Finerman. At 12.5 times earnings, with a great balance sheet and a dividend yield I don't think it's priced for perfection at all. And I take weakness in this stock as a signal that we're going to see a broad tech sell-off on Tuesday. However, on a pullback I’d put the stock on my radar. Fundamentally the company is sound.

If IBM whooshes to around $135 I'd also be a buyer says Jon Najarian. The CFO says he sees an acceleration into the end of 2010 and I take that as a reason to own the stock.

If you have a long-term time horizon, I’d be comfortable establishing a position in IBM on Tuesday, says Guy Adami.

Read more:

> IBM Profit Grows, Tops Wall Street Expectations

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Trader disclosure: On Oct.18, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami owns (AGU), (BTU), (NUE), (C), (GS), (INTC), (MSFT); Adami’s wife works at Merck; Finerman owns (AAPL); Finerman and Finerman’s firm owns (BAC); Finerman and Finerman’s firm owns (JPM); Finerman and Finerman’s firm owns (GOOG); Finerman’s firm owns (IBM); Finerman’s firm owns (MSFT); Finerman's firm is short (IJR); Finerman's firm is short (MDY); Finerman's firm is short (SPY); Finerman's firm is short (IWM); Finerman’s firm owns S&P 500 puts; Finerman’s firm owns Russell 2000 puts; Pete Najarian owns (AAPL) call spreads; Pete Najarian owns (BAC); Pete Najarian owns (ISLN) call spreads; Seymour owns (AAPL), (BAC), (MON), (GOOG), (POT); Jon Najarian owns (IBM) calls; Jon Najarian owns (AAPL) calls

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