iPhone, leader or laggard?

S&P500 daily @ 3:10 EDT

The indexes are consolidating after the recent 50point move; a normal, healthy, expected, and bullish behavior after such a big run.  No reason to sell and certainly not a good idea to short the rally.  The trend is our friend……..for the time being.  AAPL is riding high after record iPhone5 sales, but is the company falling behind its peers as other phone manufacturers are leading innovation?

MARKET SENTIMENT

Stocks paused after Friday’s new 4-year high.  While giving Friday’s gains, the market is still sitting above Thursday’s “Bernanke pop”.  This is expected and supportive behavior given the 50point move over the last two-weeks.  This is noteworthy bullish action finding support at these levels in spite of the obvious selling pressure from profit taking and shorts doubling down.

The key to figuring out where we are headed is getting into the mind of traders, especially big money managers.  We’ve had a big move since the summer’s low of 1266.  This rally has caught a lot of money managers off guard because the headlines and sentiment remain quite bearish.  But clearly the price-action indicates selling climaxed in early June.  All the sellers sold at that point and there was nowhere to go but up, and that is exactly what we’ve done.  Most watched in disbelief as we rallied, always anticipating the crash that never happened.  And now these traders are faced with a crisis of confidence and conviction, finding themselves clearly on the wrong side of the market.  We are not measured by the soundness of our ideas, bu the profits in our accounts.  The market is showing no indication it will crash and is in fact accelerating its climb higher with far fewer pullbacks giving late-chasers few opportunities to buy in.

No doubt the QE3 pop was a “come-to-Jesus” moment for many reluctant money managers.  I expect this was the breaking point for many as they finally realized they could no longer wait for the pullback and now have to start getting their portfolio in gear or else significantly underperform the indexes.  To catchup, they need to chase high-beta stocks, meaning many of those speculative sectors will start outperforming after lagging large-cap, blue-chip stocks for most of the summer.  Getting ahead of big money is where us little fish make most of our money.

And of course in its usual cruel fashion, as soon as these money managers are finally positioned on the long-side, the market will run out of buyers and nose over.   The market is a cruel, cruel beast for anyone trading behind the curve.  If you want to make money at this game, you need to get ahead of the tend, not chase it.

MARKET BEHAVIOR

Indexes are finding support at 1460, showing a fair number of people are willing to buy the market at these levels and few traders are anxious enough to sell here.  For most of the summer we traded in a volatile, upward trending channel, but the last material pullback was in July.  Almost two months without a volatile pullback shows the market has transitioned into another personality for the time being.  We are in the midst of a steady climb higher, but that pattern is getting a bit obvious and proactive traders need to start watching for the next personality of this schizophrenic market to come out.  Will that be an acceleration to the upside as big money is forced to chase the market?  Or will we finally see that material selloff everyone has called for?  Or will we see both of these happen sequentially?  I’d put my money on the third option, and in fact I already have.

TRADING OPPORTUNITIES

No reason to get less-long after this run-up.  The market is finding support and is converting former bears into believers.  Ride the wave a bit longer, but stay close to the exits.  Continue holding what is working and lock in 20-25% profits when you get them.  Most of the time you’ll sell early, but it is foolish to hold out for top dollar.  If you have a stock you know better than your spouse, you can take the chance on holding through a base, but that significantly adds to your risk profile.  And in most instances these additional risks are not necessary because it is so easy to buy a stock back after stages the next breakout.

AAPL daily @ 3:11 EDT

INDIVIDUAL STOCKS

AAPL is hitting a new high and pushing against the $700 level.  There is tons of hype over the iPhone5, but as a technology geek, I am stuck wondering if AAPL is still a leader or if it is finding itself in a lagging position.  The iPhone5 lacks any real innovation and is simply playing catchup to other phones from Samsung, HTC, and yes, even Nokia.  Larger screens, quad-core processors, and 4G have been the norm in Android phones for a year now.  No doubt the iPhone5 will be the most stylish phone out there, but is that enough when Android phones are now leading in innovation?  And how about fashion trends and people’s desire to be unique?  Does the iPhone still feel cool and special when everyone has one?  The saving grace for AAPL is the exploding global middle-class, but I expect competition will put significant pricing pressure on AAPL in coming years and this might not be a buy-and-forget-it investment going forward.  No doubt momentum is behind this stock and it could continue higher in the near-term, but from a technology and innovation point of view, Apple is falling behind its peers.  Its reputation will carry it for a little longer with consumers, but remember the stock market is forward-looking and the stock price will peak before the fundamentals do.

Stay safe