PM: Time to run for cover?

By Jani Ziedins | End of Day Analysis

Jul 24
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks had their worst day in nearly a month, but all that highlights is what a benign ride its been.  Volume was below average, but the highest in recent days.

MARKET SENTIMENT
Rather than fear a 0.4% dip, we should embrace it.  Everyone knows we cannot go up every day, yet the first day we see any weakness and all of a sudden the sky is falling.  No doubt this could be the start of something larger and why it is always prudent to take profits after nice runs, but we are still well above support and claiming this is anything more than a normal down-day is trying to pick a top.

After such a strong rebound, we need selling to put fear back into the market and keep everyone honest.  The market doesn’t like being easy or predictable, so it throws in head-fakes along the way.  Of course it is up to individual interpretation to decide if the recent rebound or today’s weakness is the real head-fake.  There are always two sides to every market and only time will tell who is right.

TRADING OPPORTUNITIES
Expected Outcome:
As long as the market remains above support, we must assume the rebound is alive and well.  Countless bears have been carried out in body bags trying to pick a top and there is no reason to add to the body count here.  Recent support is 1675 and we only need to be concerned if we fall to hold that level.

Alternate Outcome:
I’d prefer seeing the market stall after breaking 1700 before placing a short.  A notable absence of buyers in a spot where buyers should pour in makes an easy short.  Stalling prior to 1700 is far less convincing and this could simply be a pause before attempting new highs.  This rally will eventually end like every other one before.  While it doesn’t feel like we are at the top yet, we must remain vigilant.  Slicing through 1675 is clearly bearish and likely means we will retest the 50dma.

Trading Plan:
Everyone wants a rally to pullback so they can buy more, but every time it pulls back, those same traders are too afraid to buy.

Holders can keep holding as long as the market remains above their stops.  Anyone with nice profits can lock them in and wait for the next trade.  Bears can short a violation of support and bulls can buy a bounce off it.  Chances are the summer volatility will continue, so take profits early and often because they will likely evaporate days later.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS
Following last night’s earnings release, AAPL is higher in what could best be described as a relief rally.  Profits, selling prices, and margins were all down, but the damage was less bad than feared and the stock rallied.  The silver lining was higher than expected “old” generation iPhone sales, but is this really a good thing?  If new customers think old phones are good enough, is that an early indication the previously dependable 2-year upgrade cycle is coming to an end?  If current generation phones are good enough, does that mean we are moving to a 4 to 5 year upgrade cycle typically seen with PCs?  It will be interesting to see how bulls fit this earnings report into their return to dominance thesis.

People often forget how Steve Jobs turned AAPL around.  In the ’90s AAPL was a bloated, do everything for everyone company.  It gave customers what they asked for and the income statement bled for it.  When Steve Jobs returned, he showed up with a machete and cut to the bone, eliminating all but four computers, a pro desktop, a pro laptop, a consumer desktop, and a consumer laptop.  Less is more was always Jobs’ driving vision, but it seems the new AAPL is drifting away from that strategy.

The original iPhone was launched with one carrier, in one color and the only choice customers had was 4, 8, or 16GB of storage.  It stayed that way for the next three iPhone releases before AAPL finally relented and started making a CDMA iPhone  4 for Verizon.  The next year brought white phone, Sprint, T-Mobile, and finally an unlocked phone.  Currently AAPL stocks 30 iPhones 5s to cover all these customer options and people wonder why margins are falling.  Yet investors are clamoring for big phones, cheap phones, and more colors, and if you believe the leaks, they are coming.  Peak margins came when AAPL gave customers 3 choices, but for comparison, lets see how many phones AAPL will need to stock if it adds a cheap phone, a big screen, and three colors.

5 colors * 5 wireless carriers * 3 models * 3 storage sizes = 225 varieties!!!

They might sell more phones, but at what cost?  Everything for everyone rarely works and it looks like AAPL is going to learn that lesson all over again.  The company thrived under Steve Jobs because it did not listen to customers and investors.  Only time will tell what happens next, but it doesn’t look good.

Plan your trade; trade your plan

Follow

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.