Is the market complacent?

By Jani Ziedins | Intraday Analysis

Oct 23
S&P500 daily at end of day

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks slipped in early trade, but found support near 1740.  We covered 110-points in two-weeks and were up nine of the last ten session; a red day was more than expected.  We remain solidly above the summer’s trading range and comfortably above the previous high of 1729.  The market often sees a directional move following a sideways summer.  We remember the scary drops, but directional trades also take us higher, and so far the upside breakout remains intact.

MARKET SENTIMENT
Nothing calms markets like rallying prices.  We transition from fear of an economic collapse due to default to all-time highs is less than two-weeks.  Not a bad reversal for those positioned to profit from a capitulation bottom, but that was then and this is now.  While fear largely evaporated, we must remember markets don’t move on fear and greed, but buying and selling.  Even though we feel better, to understand what comes next, we need to figure out how previously nervous traders are positioned following the rebound.  Did they recognize their mistake and buy the rebound within days of finding a bottom?  While that is a level-headed and disciplined reaction, often traders don’t act rationally.  After mixing in pride and stubbornness, expect a fair number of recent sellers watched this rebound in complete disbelief.  They didn’t recognize their mistake and reverse their position, they sat there paralyzed by indecision, stuck between visions of a collapse and fear of being left behind.  While much of the fear left the market, many shell-shocked traders are still sitting on the sidelines and have yet to embrace the rebound.  Even though sentiment improved, it will take time for those left out to wade back in.  This stream of buying will push the market higher into year-end.

TRADING OPPORTUNITIES
Expected Outcome:
The market will consolidate recent gains and could pullback to 1700 or 1710, but we flushed out many of the weak sellers between the June and August lows.  Expect higher prices as confident holders keep holding for more.  Don’t mistake confident owners as signs of a top, but an indication continued tight supply.  Owners holding through modest weakness and keep a floor under the market.  The real key is watching demand.  When we run out of buyers, it doesn’t matter how tight supply is.  With the huge supply of regretful sellers sitting on the sidelines, we don’t need to worry about exhausting demand anytime soon.

Alternate Outcome:
While the market came to terms with recent headlines, we are getting comfortable and that leaves us vulnerable to a new and unexpected headline that traders have not priced in.  We could go months without a worry and cannot trade the unknown, but we can wait for it and trade it decisively when it comes.

Trading Plan:
We came a long way and there is nothing wrong with locking in profits.  For those that insist on holding, keep a trailing stop under recent support at 1700. 1710, or 1730 depending your level of risk.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS
Watching AAPL‘s product event yesterday was revealing, not so much for the incremental hardware and software upgrades, but for how they laid out their core strategy going forward.  I have to wonder if they are having a BBRY moment with their stubborn insistence on sticking to their current strategy.  Cook and Company took several shots at MSFT‘s “confused” strategy and insisted AAPL’s approach to tablets and computers would not change.  Is this similar to BBRY making fun of AAPL’s touch screen and lack of physical keyboard, claiming professionals would never embrace a soft keyboard?

In my view, AAPL is making a mistake keeping tablets and computers in separate silos.  They insist people don’t want to use a tablet like a computer and a computer like a tablet.  But let me tell you, I have enough fingerprints on my Macbook’s screen to prove otherwise.  Anyone who borrows my laptop is always trying to use the nonexistent touch interface, but Jobs said it is awkward to reach up and touch a laptop’s screens and he always knows best.  Of course he also said a 7″ tablet is “DOA” and now the iPad Mini outsells its bigger brother two to one.

Mobile operating systems, processors, and software are nothing more than placeholders until hardware specs catch up and we can fit full-powered processors and software in a tablet form factor while maintaining respectable battery life.  We should be there within two-years given the leaps INTC is making with its low-power processors.  Funny thing is AAPL already embraces these new processors in their MacBooks, achieving a shocking 12-hour battery life in the 13″ MBA.  Why do they think people don’t want a souped up tablet/keyboard combo that completely replaces their laptop?  MSFT’s “confused” strategy is to give customers everything they want and need in a single device, while AAPL thinks people want to own and use two separate devices.  How can they possibly think that when they lead the revolution that put a phone, camera, mp3 player, GPS, and web browser in a single device?  The future will continue consolidation and AAPL’s two-pronged strategy will be as obsolete as point-and-shoot cameras and hand-held GPS units.

AAPL also made a big deal about “turning the industry on its ear” by giving away software for free.  Never mind that Google’s been doing it for years and the Surface RT already includes Office, but now that AAPL is doing it, it is revolutionary.  Earlier this year Cook claimed AAPL is a software company.  I’m not sure how a software company makes money when they give away their main product for free.  Google is an advertising company that gives software away for free so they can sell more ads.  By giving away its software for free, AAPL is making a strong case that it is a hardware company and they give away the software in order to sell hardware.  What little software AAPL previously sold, they are now giving away for free, so I don’t buy the “we’re a software company” line.

And as far as software goes, I downloaded Mavericks and they need to give it away for free because it is such a minor upgrade I have yet to notice a difference.  They added iBooks and re-skinned the calendar.  Wow, color me impressed.  Oh wait, how could I forget, they added iMaps, meaning I need to hide this half-baked app on my computer just like I did on my iPhone.

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.

Jonathan October 23, 2013

I think their products are brilliant. I own a MBA and iPad. As far as phones, I decided a few months ago to throw away my iPhone and get a Samsung big screen phone. I currently have the Note 3 and can never go back to a screen smaller than 5 inches.

    Jani Ziedins October 24, 2013

    I have a love/hate relationship with AAPL. Great design and simple interface, but I hate how they lock down devices and prevent customization on both hardware and software. They do a better job that most with their stock offerings, but it is arrogant for them to assume they know best and restrict user upgrades and tweaks. If history repeats itself, Apple computers were widely perceived to be superior to Windows computers in the 90s, but that didn’t keep them from sliding to a 3% market share.

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