This will be a key week for the markets. We have AAPL’s earnings and the House vote on extending the debt ceiling three months. We also want to watch how the market responds technically to the new breakouts and if we can hold the recent gains.
As everyone knows, the markets made new 5-year highs and continues the trend of higher-highs and higher-lows over virtually every timeframe from daily charts all the way to monthlies In fact, we are not that far from making all-time highs in the S&P500 and digging our way out of the decade-long slump of the 2000s. The best time to buy-and-hold is when everyone says buy-and-hold is dead.
The big events coming up on Wednesday are AAPL’s earnings and the House’s vote to extend the debt limit three months. Normally a single stock isn’t worth discussing when talking about the broad market, but AAPL is no ordinary stock since it represents almost 5% of the S&P500’s weighting. A 10% move in AAPL could move the market 0.5% and that is before considering sympathy moves in related stocks.
How is the market lined up for these events? It seems like many investors stopped paying attention to the Debt Ceiling after the Fiscal Cliff compromise. Maybe that is because when our politicians reached a Fiscal Cliff deal, traders assumed they will do the same on the Debt Ceiling and it isn’t worth worrying about. Or maybe the market has such a short attention-span that it can’t focus on something that is still weeks away. Maybe fatigue set in and pessimists got so throughly thumped by the Fiscal Cliff rally that they just gave up. But no matter the reasoning, given the recent market’s strength, it seems selling due to Debt Ceiling worries is very limited. Without much pessimism to act as fuel, a Debt Ceiling deal will generate a modest pop at best. In fact, if more people bought the expected Debt Ceiling deal, we risk seeing a sell-the-news event when buyers fail to show up after the announcement.
AAPL is a different deal. The stock is trading at the lower end of the recent range and the latest headlines suggest a 50% reductions in iPhone5 production. The technical and fundamental story seem broken and that chased a lot of investors out of the stock. But all the selling into earnings creates an asymmetrical trade if most of the pessimistic selling happened ahead of time. Bears could very well be right about AAPL, but if the recent selling already accounted for most of this negative view, that leaves little downside for when the bad news finally come out. But what happens if the news is better than expected? The stock pops dramatically as bears get chased out in a short-squeeze.
It will be interesting to see how much influence AAPL’s earnings have on the broad market. Lately the stock has become disconnected from the market and the market could have a good day even if the market plunges, or vice versa.
Outside of these two events, the market has priced in a fair amount of optimism and is less concerned over issues that plagued the market through the last year such as Euro Contagion, Obamacare, Obama’s reelection, Fiscal Cliff, raising taxes, and now the debt ceiling. But I have little doubt the market’s next fatalistic obsession is just around the corner.
One of the more fascinating aspects of the market is you can find traders with completely different opinions on the market and they can both be right (or wrong) at the same exact time. A bear could be shorting the market and bull buying the market, and they can both make money. The bear could expect a pull back to support over the next couple weeks while the bull is expecting it to rally over the next three months. Two completely different views on the market and they can both make money if they time their sales right.
And here I find myself with a split personality. I’m bullish over the longer term, but am cautious over the short-term. And to clarify, cautious doesn’t mean bearish, just expecting the market to retrench a little before heading higher. Maybe that happens this week, but even if it doesn’t, we’ve come a long way and it is always smart to take worthwhile profits to keep greed at bay.
If too many people are taking profits here, that could keep the rally moving higher. If the premature profit takers end up buying back in, their demand pushes prices even higher. It will be an interesting week. If the market pulls back modestly and quickly finds support, it could be buyable. Same goes for a pullback to 1450, or even 1400. The one thing I would be reluctant to do is chase a surging market higher.
I’ve already discussed the AAPL trade above, but I’ll just mention the risks associated with holding through earnings. Even if the odds were an obscene 80/20 in a person’s favor, that still means one time out of five he will get it wrong. And the same can happen here, no matter how great the setup is, some trades just go bad no matter how sound the analysis and that is why we practice responsible risk management. The options market is predicting a 7% move, so if a person wanted to limit their risk to just 3% of their portfolio, don’t hold any more than 50% of your account in AAPL.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, 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 children.