Short squeeze continues

By Jani Ziedins | Intraday Analysis

Feb 11
S&P500 daily at 2:52 EST

S&P500 daily at 2:52 EST

Intraday Analysis

MARKET BEHAVIOR
Stocks smashed through the 50dma and came a long way from last week’s 1,740 lows.

MARKET SENTIMENT
Emerging Market fears evaporated as quickly as the came.  What threatened the developed world last week doesn’t even warrant a footnote this week.  Such is the ways of the market.

While everyone knows the market has periodic 5 and 10% pullbacks, they lose sight of that every time we are in the middle of one.  If everyone calmly held through a routine dip, we wouldn’t have one because the market doesn’t pullback without selling.  While in hindsight every 5% dip seems like a great buying opportunity, reality is they are terrifying events to live through.  The only reason a trader sells a 5% pullback is because they are convinced it will turn into a 10 or 20% correction.  Pullbacks work because they convince so many traders this is no ordinary dip.  That was clearly the case last week when many were dumping stocks over fears of Emerging Markets and a US economic slowdown.  But one person’s fear is another’s profit.

TRADING OPPORTUNITIES
Expected Outcome:
 Inside trading range, headed to upper bound
While we still have a way to go before this weakness proves it is nothing more than a vanilla pullback, it is shaping up that way.  Recent fears over EM and the US economy are fading as quickly as them came.  Nothing calms nerves like a rebound in prices.  But don’t expect the non-stop rally to continue.  Markets trade sideways 60% of the time and we are likely entering a 3 or 6 month consolidation as we digest last year’s big gains.  Buy weakness, sell strength.

Alternate Outcome:
While most owners are feeling better about their positions, few selloffs go in a straight line and they bounce on their way lower.  We could easily be in the process of forming a head-and-shoulders or double top.

Trading Plan:
Trading range or topping pattern?  For practical purposes it doesn’t really matter since we sell strength in both cases.  The bigger question is how high do we let this run before locking in gains.  Sell before the highs, wait for new highs, follow with a trailing stop, or the easiest, buy-and-hold.  It all depends on a traders risk tolerance and time frame.

AAPL daily at 2:52 EST

AAPL daily at 2:52 EST

INDIVIDUAL STOCKS
AAPL is close to closing the earnings gap, but that might not be so bullish.  Recent strength follows comments from Tim Cook that he spent a big chunk of his US based cash hoard buying stock over the last couple weeks and hinted at new products.  I saw one enthusiastic analyst suggest a $300 iWatch will sell in similar numbers as iPads.  I don’t know what he is smoking, but I want some.  There are few gadgets as geeky as a computer watch and there is nothing that screams enginerd like a calculator watch.  Countless people I know have iPads, yet I don’t know anyone with a geeky watch.  A more realistic sales projection would expect iWatchs to sell as well as Steve Job’s self-proclaimed Apple TV “hobby”.  The iWatch would be an interesting gadget for the Apple fanatic, but nothing more than a rounding error on the financials.  Since few people would throw out their current $2k flat screen TV for the rumored iTV, it would likely have an even smaller contribution to the bottom line.  And if this new thing is a payment processing solution, expect it to contribute generate as much profit as Google Wallet.

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.

Peto1 February 11, 2014

Jani, in a past post (a few months ago, at least) you cryptically alluded to a possible reason why you are so relentlessly – and frankly comically – negative about Apple. Would you care to elaborate on what that reason might be?

    Jani Ziedins February 11, 2014

    Everything is relative. A few years back I was bullish on Apple when many were concerned about Steve Job’s health and the size of AAPL’s run. That reluctance to own AAPL made it a great buy because it meant AAPL was undervalued and those fears were already priced in. Fast forward several years to where everyone claims AAPL is a shockingly good buy. That means all the good news is already priced in and the stock is at the very least fairly valued.

    As for the company’s products, their marketshare is in free fall as cheaper/larger devices are eating their lunch. This is the 1980’s all over again. AAPL will continue making the premiere devices in the industry and command a price premium over the competition, but they will be a niche player, not the dominant player that their biggest market cap in the world implies. The lifecycle in the tech industry is brutal and 10 years at the top is about as long as anyone can hold the crown. I’m far more interested in opportunities in tech companies that people ridicule because they are too old and slow (MSFT/INTC) or ones that everyone claims are overpriced (many of the hot new issues). In the markets when too many people agree something is a great buy, there isn’t any value there.

    As for Apple products, I am writing this on a 27″ iMac and I have a MBA on my desk. I’m on my second iPhone and so is my wife. Wile I appreciate Apple’s beautiful hardware and simple software design, I find their closed and locked system frustrating. There is only one way to use Apple’s devices and that is the way Steve Jobs allows us to use them. That works really well for soccer moms, but it leaves power uses with a love/hate relationship with the company.

dash February 14, 2014

“Recent strength follows comments from Tim Cook that he spent a big chunk of his US based cash hoard buying stock over the last couple weeks”

Yes, Tim Cook and his team sent an incredibly strong message about how undervalued they feel the stock was just below current prices. Nobody understands better the current and future opportunuties of Apple and how they feel the stock price reflects that. As for market share, who cares? Selling at razon-think margins just to get market share is a dumb strategy. The iphone generates over 80% of global smartphone profits, that’s the only stat of any importance.

    Jani Ziedins February 14, 2014

    Apple’s a great company, but will it be able to maintain its position as the most valuable company in the world over the next 12 months? Next 5 years? Next 10 years? And even if it defies the odds, what’s the upside? Keeping up with inflation? There are more interesting growth stories out there. Trade the future, not the past.

dash February 14, 2014

No doubt there are companies growing faster than Apple. Question is how much are you going to pay. All of Apple’s metrics are extremely cheap.

A lot of people think the iphone will suffer the same fate as Nokia or Blackberry. There’s a huge difference; the software/apps on those phones were irrelevant. No so for the iphone, people get locked in. I don’t know what will happen over the next 10 years, nobody does, and I don’t have to. I can sell any day. Here’s what the CEO of the company has to say. Do you seriously think you have a better understanding of the current and future growth prospects than he does?

“It means that we are betting on Apple. It means that we are really confident on what we are doing and what we plan to do,” said Mr. Cook, speaking in a conference room at the company’s corporate headquarters here. “We’re not just saying that. We’re showing that with our actions.”

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