Live by AAPL, die by AAPL

MARKET BEHAVIOR

Markets are churning about the 1450 level again.  Last few days were above, today we are back under.  The elephant in the room in AAPL and it is crushing the NASDAQ, pushing it under the 50dma for the first time since July.  Live by AAPL, die by AAPL.  The tech-heavy and smaller-cap focused NASDAQ is showing clear signs of breaking down, falling under previous support and moving averages, but the far more diversified S&P500 is still well above support and moving averages.

The divergence in the indexes is making it harder to identify the next move.  Is the NASDAQ’s weakness a single-stock or a tech-sector issue?  Or is it broader?  Is AAPL the canary in the coalmine foretelling future problems, or is it simply an issue of a momentum stock running out of new buyers?  Or is AAPL just resting before leading the markets to new highs?

So far every dip in the market and AAPL has been a buying opportunity.  Is that still the case, or is the buy the dip patter too easy and the market wants to throw in a bigger dip or correction to keep traders honest?

MARKET SENTIMENT

Four weeks until the election.  A lot can happen in the markets over 20 trading days.  Will we correct between now and then and rally afterward?  Will we rally into the election and correct after?  Or will it not matter at all?

In spite of all the debate, headlines, and talk show chatter, Obama is the clear favorite and it would be a monumental upset if Romney took the election.  The markets are always looking at the future and no doubt an Obama reelection is expected and priced in.  If Obama does win, the market could shrug because it predicted the outcome months ago.  Or even more off the wall, the market could rally after an Obama win just to humiliate everyone who insists Obama is bad for the stock market.  The stock market doesn’t do what it is supposed to do, and rallying after an Obama win would fit the bill.

But what happens if Romney wins?  That would shock the market because it is not priced in.  No doubt the initial reaction would be a surge higher, but sticking with the unpredictability theme, a Romney win could lead to a sell off.

No doubt it is contrarian to think the market will rally under an ‘anti-business’ president and sell-off under a ‘pro-business’ president.  But that is most likely what will happen.  Obama is the status quo, Romney is change.  If there is one thing the market hates, it is change and the uncertain outcome associated with change.  We know what the rules will be under Obama and we’ll get more of the same.  Romney is promising ‘repeal and replace’.  What does that mean?  What are we going to replace Obamacare and financial regulation with?  Contrary to conventional wisdom, the market will rally under Obama’s stability and it will sell off under Romney’s restructuring.

TRADING OPPORTUNITIES

The markets could go either way here and there is more risk to owning stocks than there has been in some time.  The safer trade is to wait for higher probability opportunities.  There is enough caution and pessimism in the markets to fuel additional upside.  We are still a long way from the complacency last April that lead to the big correction, so I don’t see a similar material selloff in our near future.   But we could see buying dry up and prices decline as buyers take a wait and see approach.  This is exactly what happened today as the markets sold off on average volume.  Seller was at normal volumes, but the buyers didn’t show up.  That is why the markets declined on average volume.  Will buyers come in when prices are attractive enough?  Or is there enough uncertainty that they will wait for another few percent decline before taking the bait?

The great thing about selling strength is you are not faced with these decisions.  Take your money and start looking for the next high probability trade.  Only the greedy wait for top dollar.

INDIVIDUAL STOCKS

Hard not to talk about AAPL.  It broke under the 50dma on Monday and the selloff continued Tuesday.  But the stock reversed in late morning and recovered most of today’s losses.  Was this the bounce smart money was buying, or is it simply dumb money rushing in to buy the dip?  AAPL is a great company and a great stock.  But with nearly 5,000 institutional investors owning the company, who doesn’t already have as much AAPL as they want?  Where is the next incremental buyer who pushes the stock higher going to come from?  Of course I made this same argument at $500 and was wrong.  Time will tell.

Stay safe