How about that AAPL

By Jani Ziedins | Intraday Analysis

The indexes traded in a very tight range around yesterday’s close and some will claim this shows support at this price level.  But in reality there were just as many willing sellers as willing buyers, so it is a wash from a directional standpoint and it would be more accurate to declare  today a draw.  Where we go from here largely depends on who has a bigger war chest, the bears or the bulls.

Of course the above analysis assumes we just consider buyers and sellers.  But maybe we can get a little more insight if we also include short-sellers.  Given yesterday was the largest index gain of the year and all sorts of professionals made the case this was a blow-off top, no doubt we had quite a few bears aggressively selling into this strengths.  In this regard, the buyers at least matched the best the bears could throw at them, which is moderately bullish.   And now all these new shorts are ready buyers if we move any higher and they get blow out of their positions in a short-squeeze.  Often the surge that makes the head of a head-and-shoulders is a fast upside move propelled by premature bears covering their shorts.  With the new short-sellers taken into consideration, the path of least resistance is probably still up for the moment.

And how about that AAPL?  What a monster run!  Without a doubt this stock has changed its character from steady chugger to race car.  No matter what time-frame you chose and how you draw your trend lines, today’s price action has broken above them.  Even the slope of the 50-day moving average is the steepest it has been since the depths of the 2009 bear market bottom.

Does this mean AAPL will finally get the respect it deserves and can finally shake the pathetically low 12 P/E its been hanging on to?  This is one of the fastest growing, most profitable, and exciting companies in the entire world and it is trading at a valuation comparable to a boring dividend stock with no growth prospects.  Or alternately is this stock surging in a climax-top and today’s gap-up is the last gasps of this run?

A person could make a lot of money if they got this one right.  As a non-owner, I have been pretty vocal that owners of AAPL should lock in profits back at $525 and without a doubt I was wrong on that call.  Maybe I am early, but in the markets where timing is everything, early is the same thing as wrong.

So do I continue to be wrong, or do I change sides on this trade and jump on bard this run?  As a trade, I just can’t do it.  This one clearly passed me by and I hope it keeps going up for all those who are still holding it, but the look of that chart just scares me.

Of course AAPL is more than just a single stock story.  AAPL represents more than 10% of the NASDAQ index and whichever way AAPL goes from here, it will also drag the market with it.  AAPL’s strength has almost single-handedly pulled the NASDAQ way ahead of the S&P500 since the beginning of the year.  And no doubt this is a double edged sword as a declining AAPL would also have the same outsized effect.

I wish I had a better answer for people than that.  But so far I have been wrong on this name and will probably continue for a few more days or weeks while AAPL continues its surge before finding a good level to base at.  But I do know that in the markets nothing goes up forever.  So keep an eye on this stock and if you own it, tighten up your stops and get ready to lock in those outstanding profits.  And if you end up selling too early, don’t fret, it is a fool’s game to try and top-tick the market.

 

Psychology of a Top

By Jani Ziedins | Intraday Analysis

Nice day in the markets, making new highs on both SPX and Nasdaq.  All is right in the world…..or is it?

For this discussion, I’ll define “real selling” as deliberate and rational selling done by large institutions.  And at the same time lets define “panic selling” as retail investors** who are easily spooked and allow their emotions to get the best of them.

Last week’s sell-off seemed almost entirely “panic selling” and that is evident by how quickly the market recovered.  But while short lived, this quick drop did a good job of humiliating nervous holders and almost all of them are kicking themselves this week for their momentary weakness of “panic selling”.  And on the other side, indecisive retail holders that didn’t sell were rewarded for sitting still.

But more important for our analysis is both of these groups had the idea reinforced that it is smarter to hold than it is to sell.  And this learned lesson will make it less likely we’ll have these same weak holders running for the exits next time.

What this really means for the next sell-off is there will be fewer “panicked sellers” and a greater proportion of the sell-off will be driven by “real selling”.  This is because the nervous traders “learned their lesson” last time and will not allow themselves to be part of the “panic selling” crowd this time.  Now this doesn’t mean the next drop will be the real thing, but it will have a higher probability of being the real thing simply because more of the selling will be “real selling”.  When a large number of the previously “panicked sellers” are patiently sitting on their hands, then more of the actual selling we see in the market will by default have to be “real selling”.

Now I’m going to start making up numbers purely for illustrative purposes so don’t quote me on this, but lets assume last week’s sell-off was 25% “real” and 75% “panic”.  Since there was no legitimate basis for the vast majority of selling, we rebounded in a matter of days.  But the next time we sell off, there will be fewer “panic sellers” because these people learned their lesson about selling into weakness on the first pullback.  So in this regard, the next sell-off will have a higher proportion of “real selling”.  So maybe it will be 50% real and 50% panic.

Because there is more “real selling” in this next sell-off, that dip will be a bit larger in size and duration than the one we just experienced.  But the buy-the-dip crowd will rush in and support the market because buying the dips has paid off really well recently.  You might even have some of the former “nervous sellers” buying the dip because they learned their lesson last time and want to profit this time.  And form this boundless optimism we find support and recover.

The steeper decline due to more “real selling” means we have further to go to make new highs, but now that we are 2-for-2 on bounces, almost no one is afraid of another slide because they “always” bounce.  And with this complacent attitude spreading, the next time stocks start to slide we will see very little “panic selling”.  But without any material “panic selling” this time around,  that means virtually all of the selling causing the dip is “real selling”!!!  Using my made up guesstimate, maybe 25% “panic selling” and 75% “real selling”.  And when most of the selling is “real selling”, it is finally the time to be nervous!

For those following along with a mental picture, they already know I just described the classic head-and-shoulders top.  Is this where we are headed?  I have no idea, but so far we are following the exact game plan necessary to form a head and shoulders, so it remains a real possibility and is something we need to be aware of.

One important note, this will be a smallish H&S, so the resulting correction will also be smallish.  This is because the only people who will actually see this price action are the obsessive types who follow the market daily.  And since this is a smaller portion of the people who are invested in the market, the downward swing also won’t be very large.  For a larger correction, we need to move beyond the daily-watchers and have sensational headlines drag in people who normally ignore their portfolio.  For example fear of European Financial Contagion did that last summer and we had people moving their entire 401k to cash.

As I stated in previous comments, this H&S is simply the way we are going to kick off the trading range we need to enter in order to digest these large gains since the start of the year.  Remember two steps forward, one back.

**For this argument I made retail investors out to be the stereotypical patsy, but the truth is professional investors are no more savvy and were also selling by the bucket load last week.  Anyone who puts professional money managers up on a pedestal will have a hard time explaining why the majority of them always manage to under perform the indexes.