PM: Sequester = buy?

By Jani Ziedins | Intraday Analysis

Mar 01
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

Markets rallied on bad news, what could be more normal than that?  AAPL is making new lows and looks like an interesting short.

MARKET BEHAVIOR

Stocks opened lower as the sequester deadline came and went without a compromise.  Early weakness found a bottom at 1500 and we rallied back through the day, eventually finishing up a quarter percent.

MARKET SENTIMENT

The financial press claims the market rebounded because some positive data (manufacturing activity) was more important than other negative data (slowing in Europe and Asia), but we know better.  The market bounced because it ran out of sellers.  Markets move on supply and demand; nothing more, nothing less.  Today’s developments were largely negative and firmly supported the bear’s case, but the market rallied because all the pessimists sold earlier in the week during the volatile pullbacks.  Without bears selling and putting fresh supply on the market today, we rallied.

Don’t get me wrong, fundamentals are important, but they don’t move markets, only people trading stocks does that.  If new fundamental data changes people’s view of the future, then it will move the market when traders adjust their positions.  But if the news simply reinforces what people already believe, they will keep their current positions and the market will be unaffected because no new trading took place.

This is not an easy concept to grasp, but it is the way the markets work. The worst happened today, sequestration kicked in, but the market rallied.  If someone else can come up with a good reason why markets rallied on bad news I’m all ears.  Contrary to popular opinion, the markets are rational and make perfect sense once you understand why it moves.

TRADING OPPORTUNITIES

Expected Outcome:
How can anyone be anything but long this Teflon market?  Nothing can take it down and it is proving all the doubters wrong.  This market will top because every market does, but it will not rollover for any of the reasons the cynics are pointing at.  This market will top on good news, not bad.  That biggest piece of bullish news will convince the remaining holdouts to jump in headfirst and running out of buyers is how this will end.

Keep buying weakness, but use a stop under 1500 just in case.  Look to take profits after we set a new high and the rate of gains accelerates unsustainably.

Alternate Outcome:
There are no guarantees in the market and it can do whatever it wants next week.  I don’t know what it will do, but we don’t need to in order to make money.  Success in the markets is about understanding probabilities.  If we know what is more likely to happen than not, we trade on this insight, manage our risk, and over time will come out ahead.  We will be wrong, there is no way around that, but as long as we are wrong less than we are right, we win this game.

These recent pops higher might be sucking in the last of the bulls and we are running out of new buyers.  This will exhaust the market sooner than I expect, but sticking with a stop-loss at 1500 will keep our risk manageable.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS

What is there to say about AAPL?  It made a new low and will probably keep making new lows for a while longer.  Hope is a poor strategy and it will take something more to bring this stock back to life.  Right now it is a far more attractive short than buy.  Anyone who is still holding on figuring it cannot get any worse is about to have that theory tested.

But that is just a sentiment analysis of the stock.  I also think the stock is in hot water fundamentally too.  I’m a bit of a tech geek and have been using Apple products before they were cool and have close to $5k of AAPL hardware on my desk.  But let me tell you, I stopped by the Microsoft store at the mall and they are leading the innovation charge.  My iPhone, iPad, iMac, and Macbook feel dated next to Win8 and the slick touch interface.  Without a doubt AAPL is no longer leading this race and mostly living off its reputation.  AAPL has a lot of catching up to do if it wants to keep its crown.

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.

Rob March 2, 2013

An interesting short, now? A little late to the party??? When was it an interesting long? At $700

    Jani Ziedins March 2, 2013

    I’m a swing-trader and the next 10% move in AAPL will most likely be to the downside. If 10% is not a worthwhile profit for your trading style, then obviously this is not an attractive position for you. But more importantly, people should not buy-the-dip here because prices are still headed lower.

KBB March 2, 2013

I thought maybe you might have been going somewhere until you said that Microsoft is out-innovating Apple.

Yeah, that meh Surface tablet with those awful ads that poorly imitates iPad, that came out years after iPad, sure is innovative.

LOL.

    Jani Ziedins March 2, 2013

    Success in the market is about spotting trends before other people do. AAPL is focused on building a mobile operating system, with a mobile processor, and mobile apps. MSFT’s focus is bringing a full-powered computer to a mobile sized package. It isn’t about comparing the Surface1 to the iPad4, but where technology is going. The first iPod was crap, it wasn’t until the 3rd gen iPod that AAPL finally got it right (most importantly opened it to Windows users). The first iPhone was crap and it wasn’t until the iPhone3G that AAPL finally addressed the major problems with the iPhone1 (unsubsidized price, 2G network, and inability to use custom apps).

    As a Mac user and follower of Mac news, there is a lot of concern in the community that AAPL is not only ignoring OS X, but dumbing it down to make it more like iOS. On the other hand MSFT trying to make a full-powered tablet and that is the future, not neutered mobile devices. I wouldn’t buy the the Surface1, but the Surface3 will no doubt be a fabulous device. And with MSFT you are not betting on one company, but innovation and design at all the computer companies. For example the Acer S7 ultrabok is already sexier than my MacBook Air.

    MSFT’s SOP is to let markets develop and then swoop in and take over. I had my doubts they could catch up until I saw Win8 and the how MSFT is focused on the future of computing, not making neutered devices that people want today. Most people don’t agree with me and that is why this is still an investible idea.

      Jon March 2, 2013

      AAPL is struggling to maintain its status as a leader in the mobile market they single-handedly created. Their market dominance once unchallenged is now under relentless pressure from companies seeking to out-innovate and out-price AAPL. Institutional investors have taken note. They cashed in at the highs leaving many retail investors (such as the ones posting here) scratching their heads in confusion and continuing to buy into the AAPL story.

      The question AAPL investors should be asking themselves is, who stands to profit from AAPL’s diluting market share? BBRY (or RIMM) is the perfect example. Last year it was a battered company that experienced its rebirth in investor sentiment when their anticipated earnings loss came in less than anticipated. RIMM then experienced the same run up leading up to the Z10 release that AAPL enjoyed with the iPhone 5. HPQ has the potential to experience that same rebirth. And that cycle in tech speculation continues.

      It should be clear to any investors putting their money in tech, that the pattern of tech investment is the cycle that “begins” with speculation and “ends” with the product itself and/or bottom line margins. AAPL was clearly a victim of this and continues to be. AAPL saw its highest prices leading up to the iPhone 5’s release. This was also the case leading up to the iPad Mini event. Now, the only thing that can move AAPL’s stock price are “rumors” surrounding buybacks, dividends, and splits. Even a broader market rallying is unable to drag AAPL back to $600. Sadly, AAPL continues to be a victim of buy the rumor, sell the news and nothing more. Without any real institutional support showing up, main st. investors continue to get burned as AAPL continues to test low after low.

      If you want to make money in tech, you have to be ahead of the curve and recognize how the big money invests in tech. Speculation is key! Too many AAPL investors are stuck in the present and fail to understand that AAPL going forward will be unable to drive the same profit margins it has enjoyed in a market saturated with growing competition. AAPL investors shouldn’t fool themselves (as much as they love their products), it was market dominance and gross margins which pushed AAPL past $700. The only way to do this again is to innovate by creating another paradigm-shifting product that leaves the competing market 3+ years behind.

      And since you’ve mentioned your personal connection to AAPL Jani, I feel the need to do the same. I’ve owned Apple products dating back to the last century. My business depends on Apple hardware daily. I love Apple products, revere their design philosophy, and continuously embrace their ability to “think different.” However, as you’ve noted, I too feel that AAPL has pursued a flawed strategy in consolidating their iOS platform into their product line universally. iOS has consumed the Apple brand to its detriment. OS X is a significantly weaker product today than it was several releases ago. I continue to run Snow Leopard for all professional related work and refuse to update. It is truly sad when companies ultimately become a victim of their own success.

      As a “consumer,” I too have no plans to purchase MSFT products (or BBRY, IBM, etc) in the near future. However, I recognize that as an “investor,” AAPL is not in any condition to go long by any means. I only wish I had entered a short position following the buy back rumors several weeks back.

wlb March 2, 2013

I’ve never owned an Apple product (except an ipod), but after my recent experience with Windows 8, I will be purchasing either Apple or Google products.
Bought a laptop last week. Found Window’s 8 interface to be clumsy, non-intuitive. Worked through my distate, got computer setup with everything I need. Then, programs started failing for no reason. Shortly thereafter, the computer went blue-screened, and a message showed up: your pc needs repair. Apparently, a kernel was missing.
Whatever.
Who has the time for that?
Anyway, I enjoy your daily analysis. But until you use Microsoft/Windows 8, remember that any of their innovations will face a challenging time at the beginning, and that perhaps it is best for consumers not to be early adaptors.

    Jani Ziedins March 2, 2013

    100% agree with you. Win8, the Surface, and Win8 phones don’t have the fit and polish of the more mature AAPL products, but it is the potential I am most encouraged by. Most people forget original iPhone was a grossly overpriced piece of junk, but most new products start that way. The commercial success didn’t come until the much improved and heavily subsidized iPhone3G. The original iPod was an overpriced brick and it didn’t gain wide adoption until the 3rd genration model.

    In two years I expect MSFT and INTC will sell powerful devices that make AAPL’s mobile based products seem inadequate. I also think MSFT will leverage their desktop dominance and corporate sales force to make themselves the default standard for most professional users. If you need a Windows desktop at work, why not have a seamless experience with their tablet and phone too? If you are familiar with MSFT products at work, why not used them at home too? MSFT created its monopoly not by being the best, but by being good enough. I think they will succeed the same way this time too.

    AAPL’s undoing will be focusing on mobile devices where MSFT is making handheld computers. Five-years from now our phone will plug into a docking station and be our desktop computer. MSFT gets that, AAPL doesn’t.

      Peto1 March 2, 2013

      Jani, really, stick to analyzing the broader markets where your ideas have some merit. Your punditry on Apple is just more of the same crap of which we need less since it amounts to nothing but rank opinion. You’re clearly a bright guy but your understanding of Apple is dim and dimmer …

fa March 2, 2013

Our MSFT and APPL stores here are just a block away from each other. You can stand in the side walk and look inside them both. You wouldn’t be saying this if you just look at them both, side by side, the way I see them often. You have shifted and taken a short position recently and that might be a very wise decision, however it seems like you have lost your objectivity and like many others are using this and ST to pump your shorts.
Apple has been taken over by the bears, no doubt about it. Could it go extremely lower than where it is today?……sure, but fundamental is in danger because of the msft??? come on!
I am still frequent reader of this site, so not a troll or a hater.

    Jani Ziedins March 2, 2013

    I appreciate and embrace your dissent. Too often people seek out views that reinforce their existing biases, but the best discussions and ideas come from disagreement, not groupthink.

    My thoughts on MSFT vs AAPL are about the 3+ year evolution of the technology sector. Without a doubt AAPL is the most popular company right now, but where will they be 5 years from now? GOOG is an interesting alternative to AAPL, but where they fall short is the lack of a viable desktop product. Without a doubt the future lies in continuity across all devices and GOOG comes up short here. Plus I don’t think the future is in mobile devices that run mobile operating systems and mobile apps. Three-years from now we will have full powered computers in our hands that can run desktop applications and only MSFT is moving in that direction. As a long-term Apple user, the constant dumbing down of OS X to make it more iOS like concerns me and my next computer will not be a Mac.

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