AM: How did we get here?

By Jani Ziedins | Intraday Analysis

Jul 22
S&P500 daily at 2:37 EDT

S&P500 daily at 2:37 EDT

AM Update

MARKET BEHAVIOR
Stocks coast higher and are within a few points of 1700.

MARKET SENTIMENT
The market is up 16 of the last 19 sessions as it defies all reason and logic.  Is it irrational?  Optimistically naive?  Or simply responding the only way possible given how traders are positioned?

Doubting this rally is the most crowded trade of the year, yet here we stand, 250-points higher and setting all-time highs.  Contrary to popular opinion, fundamentals and technicals don’t move markets, only buying and selling does that.  When too many people share the same outlook, they skew the market.  Traders doubting a move sell, some even go short.  This selling naturally purges cynics and replaces them with believers.  Believers who are willing to hold in the face of weakness and uncertainty.  That resolve keeps supply tight and leaves little room for the market to do anything but go but higher.  To this point patience and faith has been rewarded while those trying to outsmart the market footed the bill.

This rally soundly defeated every worry and concern cynics threw at it.  When is the last time anyone heard Fiscal Cliff, Sequester, or Cyprus?  Even Tapering is already falling off the front page. Ignoring what everyone is obsessing over is the single most difficult part of contrarian investing, but that has been the only trade to make this year.  If markets climb a wall of worry, we need something to worry about to keep propelling this rally.  The only thing I see is stubborn bears clinging to their negative outlook and this will likely let this market coast a bit higher.  After that, there is little worry left since the market already conquered everything else.  If fear fuels rallies, we need to be concerned if the tank is getting low and is something to keep an eye on.

TRADING OPPORTUNITIES
Expected Outcome:
The wind remains at the market’s back as it overcomes people’s fear of heights, but we are approaching the end of this move.  I have no idea if we will coast up to 1750 or higher in coming weeks, but it feels like the market is setting up for a Fall correction.  Nimble traders can stay long with trailing stops, but don’t get lulled into complacency by the benign headlines.

Alternate Outcome:
The most defiant rally in recent memory keeps going.  As investors sour on bonds and foreign equities, those fund flows can continue propping up US equities for months, even years to come.

Trading Plan:
Stay long this market with a trailing stop under 1680.  While of no technical significance, traders think in round numbers and 1700 is a major psychological milestone.  It could act as resistance, but look for a pop once we break through due to short-covering and breakout buying.

This market could be setting up a double-top, but let the momentum carry it a bit higher before attempting a short.  The top will only come after people stop talking about it.  Watch the headlines for the next big fear that is not priced in and be ready to ride that wave lower.  Don’t jump the gun and be prepared to wait a couple of months for the right opportunity.

And as always, after a nice run like, there is nothing wrong with taking profits and waiting for the next high-probability trade.

MSFT daily at 2:37 EDT

MSFT daily at 2:37 EDT

INDIVIDUAL STOCKS
Everyone is piling on the hate for MSFT and they deserve it after a lousy quarter, but it is foolish to assume tablets will replace computers.  We don’t need to look any further than our own driveways to see the logic people use when making purchases.  I’m making up numbers here, but something like 95% of all car trips are with a single occupant, yet  most cars have four seats.  What’s up with that?  One-seat cars would be faster, more fuel-efficient, better for the environment, and significantly less expensive.   How come no one buys them?  We don’t buy things that work most of the time, but ones that fit all our needs.  We buy cars for the  handful of trips a where we need all the seats and the same will happen with PCs and tablets.

Tablets are great, but can they replace computers?  Certainly not in their current incarnation where the most useful applications are nothing more than simple calendars and to-do lists.  People love their tablets, but I have yet to meet anyone who gave away their computer and moved exclusively to a tablet.  Tablets are an add-on, not a replacement to the utility of a PC.  In fact, I think Windows is the biggest threat to GOOG‘s Android and AAPL‘s iOS.  These are mobile operating systems designed specifically for low-power tablets, but in the very near future we will have full-power tablets capable of running Windows well.  When most of the cost of a tablet is in the screen, case, and battery, stepping up to a full power processor will be a minor upgrade and a far simpler solution than the PC/tablet combo people currently use.  Give me the portability of a tablet and the power of a desktop, I’m sold.  In a world where tablets are PC’s, is anyone going to buy GOOG’s and AAPL’s one seat-car when they could step up to MSFT’s four-seat model that covers all their needs?  Looking forward five-years, most likely our phone will be our primary computer.  Tablets and desktops will simply be docking stations for our full-powered phones.  In a world of no compromises, MSFT is still the king of productivity and dedicated mobile operating systems will soon be as obsolete as the 8-track.

The key to making money in the markets is seeing what comes next.  If we want to trade the future, who is best positioned to exploit full-powered tablets?  While the Surface is rough around the edges, that is clearly the direction tablets are going.

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.

smartone1 July 22, 2013

I disagree with your view of tablets and PCs – 98% of task done on a computer device can be done with a tablet. The PC market will never grow any bigger than it ‘s peak year of 2011 . The market for computer devices is going to grow and grow but the percentage that is a PC will keep on going down.

    Jani Ziedins July 22, 2013

    I agree, desktops and laptops as we know them are headed out the door, but Windows will be the OS of choice on full-powered phones and tablets of the future. Every student and white-collared professional cannot survive with a neutered operating system like Android or iOS. They will use a full-powered tablet/phone with Windows compatibility that docks with a desktop when they need to do real work. The future is clearly not in mobile operating systems and MSFT is the only one moving that direction.

smartone1 July 22, 2013

I disagree – in the walled garden of Intel/Microsoft duopoly a user HAD to use WIndows OS and Office to interlope and do work with 90% of all the other computers in the world . But now the internet is the OS and it is open standard . All the functions of Office are easily replicated by Google Docs which is free.

As the music industry learned you can not compete with free.

MSFT is not doomed but their market is going to shrink

    Jani Ziedins July 22, 2013

    My argument is if a person/business only needs a single Windows program, they will be stuck with the Windows platform. The days of owning both a tablet and PC/laptop are coming to an end and these devices will merge when tablets are finally powerful enough to compete. When that happens, people will buy the one device that does everything they need. So far only MSFT can offer a tablet that runs every legacy business program and it will win that segment handsdown. After that, professionals will buy and bring home the devices they are most familiar with. That is how MSFT won in the 90s and it will happen again here.

    There are advantages to the cloud like you mentioned, but why be stuck with a whimpy mobile device when for a little more money you can have a full functioning computer in your tablet? That is the one-seat vs four-seat example and people often make purchases not based on what they need daily, but the few times they need more. People don’t buy a pickup truck because they need it every day, they buy a pickup truck because they take the boat to the lake three times a year. People buy AWD cars for the four days a year there is snow on the road. They will buy a Windows tablet for the few times a year they need to run a Windows program.

Tony July 22, 2013

I agree with the author of this article. Microsoft isn’t going anywhere despite what most people think. The consumer is less than 1/4 if their target market and if you’d do some research, you’d see that consumers like me & you don’t exactly make a dent on their books. Yes, the PC market has its competition cut out for it but the majority of volume purchases made on windows OS are business. This time next year, I predict Microsofts quarterly earnings to be higher due to the fact that XP support ends in April, forcing most businesses who haven’t upgraded to do so. This fall, intel will introduce processors that are energy. Efficient giving a big boost to the surface brand and making Windows based tablets to be way cheaper than they are right now. This is the flood gates period because the Xbox one cones out in the fall to. Apple will keep on releasing phones that are a generation old and let’s face it, android will never go the enterprise way in its current state. So yes! Consumers might buy tablets but tablets will never totally replace Desktops.

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