PM: AAPL sells the news

By Jani Ziedins | End of Day Analysis

Feb 12
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

The S&P500 made a new high as volume returned, further supporting recent levels.  AAPL fell after Cook disappointed the hopeful, and FOSL still looks interesting.


Another new high as stocks broke 1520 on average volume and traders finally returned after two holiday-like volume days on Friday and Monday.  The intraday range was tight and the market is taking a break after last week’s volatility.  All good signs of support for these new levels.


Two things we know about this market, 1) it is not breaking down and 2) it is not taking off.  While fairly basic, these two characteristics are highly insightful.  Each dip last week bounced back decisively after an early flurry of selling.  The market found a bottom and rebounded because most holders are comfortable with their positions and not easily spooked by weakness.  On the other side, the rate of gains is fairly moderate as new buyers are only trickling in at this point.  There is no irrational chasing, simply pessimists joining the rally bandwagon a handful at a time.  This slow erosion of bears is what is pushing the market higher.

If those two characteristics are driving this rally, then we need to be on the lookout for a change in either.  Failing to hold support would be a big flag showing holders are not as confident.  On the other side, if we see a mad dash to buy this market, expect that buying to exhaust itself fairly quickly.


Expected Outcome:
This is turning into a broken record, but keep doing what is working.  Often the market adopts a consistent personality for an entire quarter as fund managers fall into the same pattern.  This quarter is driven by big money chasing the market higher.  Next quarter could be volatile sideways trade and the quarter after that is the expected selloff.  This quarterly behavior isn’t the rule, but it happens often enough to be noteworthy and it potentially means we have 6-weeks left in this rally.

Alternate Outcome:
The days in this rally are numbered and we are on day and a few points closer to the end of this run.  Look for a change in character between not holding support, increased volatility, or a surge higher.

I surprised a few people when I said I am 300% long S&P500 index funds.  While that sounds like a lot of risk, we cannot make a valid risk assessment based on leverage alone.  A huge move in the S&P500 is 2%, while a big move in AAPL is 10%.  When factoring in volatility, the risk in a 300% index position is not all that different from a 50% stake in AAPL.

But having said that, I trade what works well for me and that is swing-trading the indexes using leverage to spice up the returns.  I follow the S&P500 close enough that I often know when a trade is not going to work out even before it hits my stops.  This is the level of risk I am comfortable with, but it took years to work up to this level.  I always suggest people trade what they are most comfortable with.


AAPL daily at end of day

AAPL daily at end of day

AAPL hit its head on $485 yesterday and sold off ever since.  We will see what the stock has in store for us tomorrow, but this is shaping up as a boiler plate sell-the-news trade.  Tim Cook seemed openly hostile to accusations of cash hoarding and it doesn’t look like the company’s stance will change in the near-term.  If this was the catalyst traders used to justify bidding up the stock, they need to close out once their original thesis proves invalid.  The stock can rally for any number of reasons, but an increased dividend seems less likely.  If the stock doesn’t come back to life on Wednesday, look for a retest of recent lows.

FOSL closed at the lows of the day’s trading range and almost closed the opening gap.  Even with the intraday selloff the stock still looks interesting as long as it finds support.  Often the more cynical traders are to a story, the more likely it is to work.  Just look at NFLX, AMZN, and LNKD for recent examples.  Look for support at $106 and the trade will clearly be broken if the stock dips under $102.

Stay safe


About the Author

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.