Will IBM earnings be good enough to fuel the rally?

10/15/2009 11:16 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

IBM (IBM) got almost everything right in its October 15 earnings announcement. And still the shares dropped almost 4% in after-hours trading.

Sales fell 6.9% from the third quarter of 2008 to $23.6 billion. But that still beat Wall Street projections for sales of $23.4 billion.

Earnings for the third quarter climbed by 14% from the third quarter of 2008 to $2.40 a share. That was a penny ahead of Wall Street expectations.

And IBM raised guidance for the full year to at least $9.85 a share. Analysts had been calling for $9.78 a share.

And still the stock fell. Why? I"ve heard two explanations.

I think the drop is nothing but normal sell-on-the news profit taking. Shares of IBM had been up 7% this month. With earnings news behind them, some momentum traders I'm sure decided to sell.

If that's the case, then today's sell off in IBM isn't a sign of any real damage to the technology sector, which has been leading this rally recently. The results won't provide more fuel for the rally, it's true, but will leave the sector stuck in neutral waiting for reports from Texas Instruments (TXN) and Microsoft (MSFT) next week.

But I've heard a darker explanation. IBM  announced that new contract signings dropped in the quarter. That could be a sign that IBM customers--and perhaps technology customers as a whole--aren't ready to step up with new orders quite yet.

Signed service contracts, for example, dropped 7% in the quarter.

Friday isn't likely to give investors a definite read on market reaction. After a strong move upward like we had in the first half of the week, stocks frequently take a hit on profit taking on Friday. No one wants to risk the week's gains over the weekend when markets are closed and traders can't react to news.

Next week, though, is likely to tell the tale.

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