Stocks opened weak in what looks like another buying opportunity, or is it? AAPL’s struggles continue . What will it take to turn the stock around?
Stocks are down half-a-percent on the first day of the second quarter. They found early support at 1560 and are trading sideways through late morning trade.
Is this just another routine dip on the way higher? In a rally, far more dips are buyable because they all bounce until the one that doesn’t. We could see twenty buyable dips before coming to the one that doesn’t bounce. I’m just making up numbers here, but without additional information, it is far smarter to buy a dip because 95% of the time it will bounce. This shows why picking tops is often a fools game because tops happen so infrequently. But that is in the absence of other information. The last few months has seen countless buying opportunities, but each one brings us one step closer to the end. If we had eighteen consecutive rebounds, then the odds of a top become far more likely, going from 5% to 50% in the hypothetical example. When combined with the limited upside and material downside after a large move, buying the dip becomes a poor trade, even if it does bounce. Success in the markets isn’t about predicting the future, but understanding probabilities and weighing that against risk versus reward.
Taking a deeper look at both sides of the argument here.
Bull Case: The momentum is clearly higher and the trend of higher-highs and higher-lows remains intact. The economy continues improving; the pace is slower than anyone wants, but the direction remains positive. Corporate earnings and balance sheets are as strong as they’ve ever been and valuations are far more reasonable than the two previous times we traded these levels.
Bear Case: Every rally comes to an end and this one is 4.5 months old. Further the market’s personality often changes with each new quarter. A lot of optimism is already priced in the market as sentiment shifted from paranoid pessimism in January and February to near complacency because everyone expects Uncle Ben will take care of us.
These arguments are equally compelling and is why both sides have passionate supporters. But this is always the case. If the answer was obvious, market participants would make the easy trade and buy/sell stocks until the price changed enough to bring opposing views back in balance. The legitimacy of both points of view is what makes it so difficult to trade the market.
While the trend is higher, we don’t need to hold out for those last few dollars of upside. Its been a good run and everyone know this cannot go on forever. It is often better to get out while everyone else is oblivious to the risks because it gets ugly when everyone rushes for the exits at the same time. I don’t know which dip will not bounce, but I know it gets closer by the day.
A dip to support at 1560 is hardly a breakdown and simply resting after setting a new closing high last week. At this point the market needs to fall past 1538 to start a new trend of lower-lows and that is still twenty-points away. Momentum is clearly higher and continued support at 1560 shows buyers are still willing and able to step in at these levels. The pullback case rests on running out of buyers and as long as we have buyers, we will continue higher.
AAPL is having another ugly day and this is the fourth consecutive down-day. The stock fell $35 from the recent break above the 50dam. Obviously the stock was unable to attract wider follow-on buying after clearing this technical milestone and the stock collapsed after the “choir” ran out of money buying the dip. The question any AAPL bull needs to ask is who is the next buyer? All the faithful already own as much as they can hold and the wider market doesn’t seem interested in the outstanding valuation, margins, cash hoard, or history of innovation. If AAPL cannot find buyers at a forward P/E of 8 ex-cash, is falling to 7 really going to make everyone wake up and rush to buy the stock? AAPL might make great products, but the stock is clearly broken and the trend of lower-lows remains intact until it can attract new buyers.
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.