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.


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.


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.


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


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


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.