AAPL wins, everyone loses

S&P500 daily @ 3:05 EDT

MARKET SENTIMENT

Markets are up modestly in early trade, but that demonstrates good follow-on support for Friday’s 1400 bounce.  Constructive and sustainable gains are made by grinding higher slowly and include an occasional pullback here and there.

Bears remain cynical of this market and are arguing with Friday’s reversals.  The dip to 1400 was an excellent time to take profits on a counter-trend trade, but many bears were greedy and held on, expecting a larger slide.  And now all their profits are evaporating and turning into losses.  The market doesn’t care how thoughtful an argument is, it will run over us just the same.

Over shorter time-frames the market operates on supply and demand regardless of what the news, fundamentals, or technicals indicate the market should do.  The market goes up when shares are scarce and down when they are plentiful.   The low-volume trade we are witnessing shows few shares are available and this is contributing to the tight supply, and thus creep higher.  The bears have already sold their shares or gone short, but all their selling was unable to flood the market with supply.  The market gladly swallowed those shares and is asking for more.  No matter what the fundamentals have been, the market is headed higher and as traders we have to respect that.

MARKET BEHAVIOR

The market continues to show upside resilience with low volatility.  Sustainable rallies go up in smaller steps with low volatility and everything continues to point to a move higher.  Typically volatility will creep in prior to a reversal as the battle between bulls and bears heats up, but we are not seeing signs of that.  Most rallies end by rolling over with a more rounded and choppy top, not in a spike, so bulls have time on their side and no need to be standing by the door with a trigger-finger just yet.  If we stall again at 1425 and return to 1400, then we will need to reevaluate our bullish thesis.

TRADING OPPORTUNITIES

Stay on the long side.  Lots of breakouts to choose from, but don’t chase anything more than 5% extended from a proper buy point.  Last week’s pullback brought some stocks back into buy ranges.  If you missed those, there will be other opportunities in coming weeks from 50dma pullbacks and bounces.

INDIVIDUAL STOCKS

AAPL is higher on its successful litigation with Samsung on Friday.  But what might be a short-term victory will be a long-term loss for Apple, the industry, and consumers.  The patent system is badly broken and not able to handle the technological age we are living in.  For example, one of the patented items Apple was suing Samsung over was how when you get to the last photo on a list, the last pictures initially moves but then snaps back indicating the end of the list.  How in the world is something like that patentable?  Is it really Unique, Useful, and Non-Obvious?  Does it deserves 20 year protection in order for Apple to recover the investment spent developing it?  Is that really an invention or simply a design element?  Give me a break.

But here is the thing, this closed attitude in technology is bad for everyone because stifles innovation.  Apple won this battle, but it will lose the war when other companies start locking down every trivial ‘invention’ and that will prevent anyone from building a usable device without infringing on dozens of patents.  Apple is the current innovation leader, but so was Palm, Nokia, Motorola, and RIM.  Apple is building this culture of patent litigation and it is hurting everyone in the process.  If this stands, it could eventually spell the end of Apple’s reign as it gets out innovated by someone with other trivial “inventions” that locks Apple out of the next round of phone designs.  Congress or the Supreme Court really needs to get involved and strike down this silly business methods patent garbage.  And while their at it, eliminate patent squatting too.  Patents were intended to foster innovation by rewarding inventors, not stifle innovation by preventing everyone from doing anything.

In practice most of these mega companies simply cross license each others patents, but what this game of giants does is it locks out the small innovator without deep pockets who cannot afford to play patent roulette.  The big guys will sue any upstart out of business because every new device will infringe on dozens of existing bogus patents.  When the little guy loses, we all lose.

Stay safe