AM: Markets surge while AAPL tanks

S&P500 daily at 1:00 EST

AM Update

AAPL tanks and the market breaks 1500, what’s going on here?

MARKET BEHAVIOR

The market ignored all the noise over AAPL’s plunge and broke above 1500 in early trade.  Clearly the AAPL story is a single-stock event and the rest of the market is doing fine without its leadership.

MARKET SENTIMENT

I am surprised at the market’s resilience when the index’s biggest member stumbles in a bad way, but this is just another example of the market doing the least expected thing.  The market clearly wants to go higher and it is winning over reluctant traders with each passing day.  The only question is how many reluctant traders are left to win over before we run out of new buyers?

Today is the first day in a while that started strong and it will be interesting to see what happens in the second half of the day. Often these things go further and longer than most expect and that is clearly the case here.  Earnings have been fairly decent, even AAPL put up good numbers, so it seems the economic recovery is still intact and things are turning out better than feared.

It appears the Debt Ceiling showdown is being postponed and the market has yet to find a new fatalistic obsession.  Right now the only thing bothering traders seems to be too-far, too-fast and that is easily overcome by the market’s continued strength.  The thing we need to keep an eye on is the level of cynicism remaining in the market, if this market wins over too many fans, then we are approaching saturation and will run out of new buyers.

TRADING OPPORTUNITIES

Expected Outcome:
The market clearly wants to go higher and it would be foolish to try to short such a strong market, but that widespread attitude could be the thing that finally lets a short work.  Those that are still in the market can move up their stops and hold for a little longer, but there is nothing wrong with locking-in profits and waiting for the next trade.  The difficult trade is for those on the outside looking in.  It is tough to watch other people make money, but never force a trade just because you feel like you are being left behind.  There will be countless profit opportunities over the next 11-1/2 months.  If you missed this trade, just wait for the next one.

Alternate Outcome:
Last year’s Q1 rally continued for 3-months and we could easily see something similar here, but we need to look at what made last year’s Q1 rally possible.  The summer of 2011 saw a massive selloff between the downgrade of US debt and financial instability in Europe.  The markets sold off nearly 20% in a matter of days followed by moths of volatile sideways trade prior to the record-setting 2012 Q1 rally.  Compare that to this summer’s 8% dip and concern over spending another four years with the same Democrat in the White House.  These are two radically different setups and they will most likely produce different results as well.

The fear of a global depression in 2011 gave traders flashbacks to 2008 and they sold in droves.  It was the pervasive pessimism and huge pool of sellers that provided the fuel for the 2012 Q1 rebound.  We also had a wave of selling last summer, but it was far smaller, meaning the fuel for this Q1 rally is more limited.  No doubt we can keep going higher, but it needs to be part of a sustainable grind higher, not a race to 1600 that will inevitably run out of gas and come back down.

AAPL daily at 1:00 EST

INDIVIDUAL STOCKS

What can we say about AAPL?  AAPL reported one of the most profitable quarters in the history of the world and investors blasted the stock for being too predictable, stable, and profitable.  The ironic thing is if Cook came out and said we are changing our strategy and sacrificing margins for market-share, the stock would have shot up like a rocket.  For whatever reason, investors are punishing AAPL for its high-dollar, high-margin product lineup and predicting it is the next Blockbuster Video and on the verge of going out of business.  But the truth is smartphones have barely penetrated the global market and there is so much upside that both AAPL and Samsung will hardly be able to keep up with demand.  But everyone assumes because AAPL isn’t selling a $15 smart phone that they are headed out of business.  Someone better tell BMW and Nordstroms that they don’t have a viable business model because they don’t sell scooters or have dollar bins for poor people.

But no matter what, we trade the market and the market doesn’t like AAPL.  What we are watching is the cleansing process; AAPL was the most loved stock on Wall Street and now it has to become the most hated before it can recover.  NFLX and FB went through the same thing and provide a roadmap for AAPL’s eventual recovery.  My mistake was thinking sentiment had bottomed, but where I went wrong was not recognizing that a stock as loved as AAPL was needs to become even more hated than what is normally required to bottom.  This plunge to $450 certainly goes a long way to achieving that goal.  It might not be the final bottom, but we are getting close.

Hopefully most people closed out their trades and are not willing to ride this thing down.  While Apple Inc. might be a great company, we trade the stock and stubbornness should never let us go down with the ship.  The greatest advantage individual investors have is our nimbleness.  We can get in and out of positions in seconds and if we don’t take advantage of this, we give up the only edge we have on large institutions.  I’m not promoting overtrading, just saying that we don’t have to go down with the ship.  Sell out of AAPL here, clear your head, look for the right entry and jump back on board when the time is right.  There is no reason any of us should ride AAPL from $700 to $450.  That is the way people go broke.  Take our loss and move on.

Stay safe