PM: Yet another new high

By Jani Ziedins | End of Day Analysis

May 21
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks closed above 1665 for the third time in a row as buyers keep buying and holders keep holding.  Volume was slightly above average as we support record highs.

MARKET SENTIMENT
As “overvalued” and “over-bought” as this market is supposed to be, it sure isn’t acting like it.  Most people know prices rise on strong demand, but they also rise on tight supply.  Many are afraid of this market but we keep pushing to new highs because current holders don’t want to sell and that keeps supply scarce.  Under those conditions we don’t need a lot of demand to continue rallying.

Fiscal Cliff, Sequester, Cyprus, Socialists in Italy, weak hiring, and all the rest were reasons this market was going to collapse.  Everyone knew it was a dangerous and they stood on the sidelines waiting for the inevitable crash.  Yet here we are at all time highs.  What happened?  Why was everyone so wrong?  The market fully priced in these risks and when events turned out less bad than feared, the market rallied strongly in relief.  One of the most difficult things to do is ignore what everyone else is concerned about, but clearly that was the right trade this year.

TRADING OPPORTUNITIES
Expected Outcome:
No one knows where this is going.  I was bullish since the November lows, but this rally easily beat my wildest expectations by over 100-points.  Successful traders recognize their mistakes and adapt to the market we are given.  It is okay to be wrong, it is fatal to stay wrong.  No matter what we think, the trend remains higher and is the only trade to make here.

Alternate Outcome:
I have no idea how long this rally will last.  It’s been a painfully easy rally to ride, but at some point the music will stop and we don’t want to be left holding the bag when that happens.  Given the speed of recent gains and breaking above the upper trend-line, we need to be increasingly alert for a pullback.  There is a difference between a modest pause that refreshes and one that starts a major correction.  We have key support levels to watch and trade, but until we violate them, assume every dip is buyable.

Trading Plan:
Holding 1665 through Wednesday shows buyers believe in this market and new-high profit-taking is winding down.  Medium demand and tight supply equal higher prices.  Baring a stumble on Wednesday, that is where we are headed.  There is no reason we need to be in this market and locking in gains is a prudent move given the strength of recent gains, but shorting remains a fool’s game as this market shows no signs of letting up or breaking down.  Key support is way back at 1600, but the defensive optimist will move his stop up to 1650.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS
AAPL closed modestly in the red following Cook’s grilling on Capitol Hill.  No fundamental news was revealed during the hearings and this was just an excuse for the cautious and bearish to sell stock.  Completely unrelated to this appearance, all the calls for Cook’s head are ridiculous.  Cook is running a great company with strong revenues and historic earnings.  What more can we ask of a CEO?  He has zero control over the popularity contest also known as the stock market.  Steve Jobs was a great visionary, but most people unrealistically view him as a superhero.  They think AAPL would be $1000 if Jobs were still a the helm and inventing the next must have device, but what most forget is innovation was already drying up under Jobs tenure.

The brilliant and groundbreaking decision was a building the iPod.  From there everything has been evolutionary.  The iPod’s dominance was threatened by phones with built-in MP3 players, so in reality the iPhone was a defensive product.  The genius came from ditching a keyboard and buttons to maximize screen space for web surfing.  The next great idea was the App Store, but that was driven by hackers who were jail-breaking early iPhones.  Jobs fought stubbornly to lock down the iPhone for as long as he could, but his eventually giving into the hackers is one of the best things that happened to the iPhone because it made it a truly useful and must have device.  That was in 2008 and since then everything out of Apple has been incremental and easily predictable.  The iPad is just a large iPhone, without the phone, and the iPad Mini is just a smaller iPad.  iTV and iWatch will never be more than niche products because they lack the innovative and utility break thoughts that made the iPod and iPhone sensational and fabulously successful products.    Even though the stock prices climbed through 2012, the innovation at Apple peaked under Steve Jobs back in 2008.

Cook is a great CEO and he is not responsible for the stock’s price decline.  Even Jobs would have been helpless to prevent the euphoric run-up and subsequent selloff.  That’s the way crowds work and is not a reason to remove a perfectly competent CEO.

Plan your trade; trade your plan

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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.