PM: Buy or sell?

By Jani Ziedins | End of Day Analysis

Feb 26
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

The market took a break after yesterday’s major slide and AAPL bounced ahead of Wednesday’s investor day.

MARKET BEHAVIOR

Stocks reclaimed a portion of yesterday’s selloff, but remain under 1500.  Volume was just 1% lower than yesterday’s plunge, showing a fair number of shares changed hands.  The 0.6% bounce was enough to recover the final minutes of Monday’s panic selling, but the market refused to climb above 1500, an obvious technical level for anyone who even casually follows stock charts.

MARKET SENTIMENT

Buyable dip or dead-cat bounce?  That’s the million-dollar question.  The market bounced off 1500 half a dozen times over the last few weeks, does it have one last helping hand for the market, or will former support turn into resistance?

1500 is the line in the sand.  Rallying above this key level will trigger a short-squeeze and send the market higher on a wave of short covering.  Momentum traders will jump on the bandwagon, helping propel the market through 1510.  Recovering the majority of the selloff will put peoples’ minds at ease and the rally continues.  Or the market bumps its head on 1500 and the selloff continues.

TRADING OPPORTUNITIES

Expected Outcome:
I still think the market has new highs in it, but what I think doesn’t matter and we need to follow the market’s lead.  A break above 1500 is buyable and a break below 1475 is shortable.  In the meantime, look for the market to oscillate between these levels.  It‘s entirely possible we see a third-wave of selling take us to 1475 before we finally bottom, reclaim 1500, and make new highs.  The obvious breakout trade is often too easy, so anticipate a head-fake or two along the way.

Take this time to plan your trade.  Will you buy a break above 1500?  What will your stop-loss be?  What profit target are you looking for?  Will you short resistance at 1500?  What stop will you use?  What is your profit target?  What about a break below 1475?  Plan your trade and trade your plan.

Alternate Outcome:

The expected trade is an eventual rebound to new highs, but this market could easily be topping.  The bears have reams of data showing how horrible the world is and they could be right.  We trade with stop-losses because it is impossible to be right every time.  Success isn’t about how much money we make when we are right, but how little we lose when we are wrong.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS

Finally something new to talk about with AAPL.  The stock popped $10 after rumors surfaced that Cook will announce a 10 for 1 stock split at Wednesday’s investor day.  I’m not sure why people are so excited about this; maybe they are just bad at math.  When I was a kid, my dad was teaching my brother and I about money.  He offered to trade my 6-year-old brother’s $1 allowance for three-quarters.  My brother thought more was obviously better and took my dad’s offer.  That’s what I think of when people get excited about stock splits.

People will argue $45 is far more accessible than $450 and it will let little guys buy the stock, adding to demand, and pushing prices higher.  Of course on the other side, $450 is far more prestigious and impressive than $45.  Of all the exciting and innovative tech companies out there, how many have a stock price less than $100?  If AAPL is desperate enough to cater to the 20-year-old investor demographic, that will be a major turning point in a once proud company.

I have little doubt the stock-split crowd will bid up a split, but that is a selling opportunity, not a fundamental catalyst.   Far more interesting will be details of what AAPL plans to do with its cash hoard, but since the company has a history of under delivering in this regard, expect the market to be disappointed yet again.

Investors are waiting for more pioneering innovation out of AAPL.  The stock is lagging because competition is catching up, and in some cases exceeding AAPL.  Stock splits and dividends ignore the real reason AAPL’s stock is lagging.  Without addressing the root cause, expect the lagging to continue.

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.