AM: Markets surge while AAPL tanks

By Jani Ziedins | Intraday Analysis

Jan 24
S&P500 daily at 1:00 EST

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

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

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.

Mark January 24, 2013

BMW is a good example in 80’s they produced expensive luxury cars available to a minority now they mass produce and sell more widely similar to how AAPL should be viewed imo. Today looks like capitulation looking at volume

    Jani Ziedins January 24, 2013

    Today will have gigantic volume, but it is probably still too tempting of a buy-the-dip story and we could see a little more weakness ahead. The stock won’t rebound for good until everyone hates the stock and we probably still have a little ways to go.

Adarsh January 24, 2013

Nice article!
I know what you mean. Im currently riding apple down from 560 to 450 now. But I dont wanna sell it at the right bottom rather hold onto it and see how 2013 fares for Apple.
What do you think?

    Jani Ziedins January 24, 2013

    Apple Inc’s earnings clearly show it is a viable and highly successful company, the problem AAPL stock ran into is a sentiment one. AAPL will go down until everyone leaves it for dead. We could see further short-term weakness because it is still a tempting buy-the-dip story.

    It isn’t about if and when AAPL will recover, but risk-management. If AAPL is a small portion of your portfolio, holding isn’t too risky, but if AAPL is your largest position, you probably want to scale back. In situations like this you want to fear further losses more than missed bounces. There will always be future profit opportunities, but losses are forever.

      Adarsh January 24, 2013

      Hi Jani,

      Thanks for your insights!
      Apple is about 50% of my portfolio and I was holding it for the bounce as you mentioned.
      I know things do not look good in the short term but apple still maintains that they are accessing the stock buy back program and tapping the market in China.
      There were no clear announcements after the results which is typical of apple top brass. Till then its on the way to lose its most valuable company tag soon and more hurt for long ….

        Jani Ziedins January 24, 2013

        The challenge is getting past the emotion tied to our positions. One way do this is imagine a friend came to you with this exact situation, what would you recommend he do? The closeness of the situation clouds our vision and role playing can help get us past this. If you cannot recommend holding to a friend, that will be your answer.

        The beauty of being a small investor is it is so easy for us to get in and out. Sell, look at the situation with a clear head, and then buy back in if it still makes sense. AAPL is a great company, but so is CSCO and I know people who bought in near $80 and are still waiting for it to come back.

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