January 24th, 2013

AAPL Update

imageA friend asked last night whether it might be time to jump on AAPL, now that it’s dropped so precipitously.  I referred him back to a piece I’d written early last November when the stock was at 563 entitled “AAPL Gets a Cold, the Market Gets …..?” in which I said that AAPL was forming a perfect head-and-shoulders top reversal pattern and, if it held to completion then the stock could fall to 385.

At the time, a call that AAPL would fall to 385 looked bold.  However, head-and-shoulder patterns are one of the most reliable chart patterns as are the mirror image of inverted head-and-shoulders as bottom reversal patterns (click on image to enlarge).

AAPL - 20130124

AAPL gapped down 61 points, or 12%.  My friend asked three questions: Why didn’t you sell short when you had confidence in the chart?  Should I sell short now?  Or should I buy now since it’s dropped so much already?  Typical questions that we ask every day about every stock currently in our Model Portfolio or stocks that we are looking to buy.

The first two question can be answered as a matter of general policy: I don’t short stocks.  I’ve tried it over the years and have lost money nearly each time.  Stocks can double if you hold them long enough in good market conditions but the odds of them falling 50% is rare.  We believe that the market controls 50% of a stocks action, industry 30% and factors specific to the individual stock only 20%.  Furthermore, based on my study of the stock market over the past 50 years, I know that the market increases 70% of the time.  So the odds are against you 70% of the time when you bet a stock will decline by selling it short.  You have to have close to 100% certainty that a stock will decline before taking on such long odds and, because I trade stocks based on my assessment of supply and demand dynamics rather than fundamentals, I never have that level of certainty.

The answer as to whether AAPL is a buy today is also rather easy and summed up in the Wall Street saying: “Never try to catch a falling knife”.  Right now, AAPL is clearly a falling knife.  Someday, somewhere, it will hit the ground; it’s just that we don’t know where.  When it does, the tide of momentum will have to reverse.  AAPL fell because almost every large institutional investor had AAPL as one of their major holdings.  There just wasn’t anyone in the market to sustain the demand and keep the price rising.  The balance of power flipped from demand-driven momentum to momentum propelled by supply.

As the chart above indicates, it took eight or nine months for momentum to turn from demand to supply; it will take an extended period of time for it to flip back from supply to demand.  Individual investors don’t have to be the first ones to climb on that train since we have no way of knowing when it will change direction.  What we do know is that there will be plenty of time for the individual investor to climb onto a moving train that has as large capitalization as AAPL.

My earlier guess was that the “roundhouse” will be in the 350-400 range.  No need to panic and buy now.

November 28th, 2012

Head-and-Shoulders Patterns: AAPL and GLD Case Studies

In my book, Run with the Herd, I retell the coin toss experiment from Burton Malkiel’s book, A Random Walk Down Wall Street.  In it, he asked students to

“continuously toss coins with heads arbitrarily representing a move up in a stock’s price and, conversely, tails a move down.  All the price changes were assumed to be of equal magnitude and all were recorded in a line chart.  After an unspecified number of tosses, the students began to see patterns in the charts that looked similar to those of stock charts.”

One of the most talked about, recognized and perhaps most reliable stock chart patterns are the head-and-shoulders and its mirror image the inverted head-and-shoulders. What makes these patterns so important is that they fall into the reversal category (as contrasted with the continuation or trending patterns).  In these patterns, the price/value of the stock, index or commodity makes three different attempts to reverse the direction of the prevailing trend.  Characteristically, the price/value reaches approximately the same level the first two times and then falters; it succeeds in the third attempt and crosses the level reached the previous two attempts. The elements of the pattern include a shorter left “shoulder”, a longer middle “head”, and a shorter right shoulder; all are connected by a trendline at what is called a “neckline”.

As you might expect, as a chartist I believe that comparison between the randomness of coin tosses and stock chart patterns is a false one using the wrong logical argument (incorrectly using deductive reasoning rather than inductive reasoning).  But it is true, however, that the head-and-shoulder chart patterns are easier to perceive in retrospect and not as readily discernable in real-time.  Furthermore, when the pattern has evolved sufficiently in order to actually intimate its future likely outline, the practical question remains as to when might be the best (highest probability of being realized with the lowest risk of being failing) time to act on that perception.  Here are two cases in point:

    • AAPL: At the beginning of the month, I wrote a piece entitled “AAPL Gets a Cold, the Market Gets …..?” when the stock was at 563 in which I included a chart showing a partially formed head-and-shoulder pattern and wrote: “Has the stock hit bottom and is it poised for a turn around (a large Wall Street firm recently called on CNBC for AAPL to more than double over the next year)?  Double it might but in the near-term it’s setting up for another 25% decline below what might be consider the neckline of an emerging head-and-shoulder topall the way down to 390 (nearly 30% from current levels).”Compare the chart in that post with the one below and you’ll find that AAPL is closely following the course outlined there:

      Although Robert Weinstein of Cramer’s theStreet.com wrote today that investors should “Put Away the Prozac, Apple’s Just Fine”, this emerging pattern continues to look to me uncannily like an emerging head-and-shoulders top [Cramer's Action Alerts Plus service has been a long-term AAPL investor with a 90+% profit].  There’s no way to tell whether the stock will follow-through but it pivots and starts declining again, I would order a refill from the pharmacy.

    • GLD: I wrote a piece at the beginning of the summer entitled “When It Comes to Technical Analysis, Accuracy Depends on Time Horizon (GLD)” in which I included a chart of GLD with a pattern that looked like a descending channel and wrote: “I look at a possible breakout from my flag and see a long-term move equal to the preceding the neckline.  I see the possibility of a 75-80% move to the 250-270 level over a year or two.  It all depends on how much time you want to spend managing your portfolio and making trading decisions.”

Today that channel has morphed into what might turn out ultimately to be an inverted head-and-shoulder pattern.  The hesitation in calling it that is that the pattern is developing after a major bull run rather than at the bottom of a major decline.  Consequently, this inverted head-and-shoulder will further morph a consolidation pattern or some type of reversal top pattern.

Bottom line, no matter how good these chart patterns may look a year from now, unless and until they cross their necklines, there’s no certainty that they won’t fail to deliver.  While getting in early will produce a greater return, the trade entails more risk that the stock moves in the opposite direction.  [In fact, even after a trendline is crossed, the stock will often reverse and test the trendline in what is called a "Buyers'/Sellers' Remorse Correction".]

 

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November 8th, 2012

AAPL Gets a Cold, the Market Gets …..?

I searched this blog to see what I may have written about AAPL over the years and found that there have been 15 individual posts since 2006, many comparing AAPL and GOOG (search other terms by using the search button in the lower left panel).

But situation is dramatically different today than it’s been at any previous time [haven't people gotten into a lot of trouble when they claim "this time it's different"?]:

  • Jobs is no longer the creative or leadership head of the company,
  • the company now has competition for its products (e.g., Samsung) and its services (iTunes vs. Pandora, Spotify and Amazon)
  •  the stock became the largest capitalized stock in the world and held a dominant role in all market indexes
  • the stock is considered “overbought” being a large position in nearly every mutual, pension and hedge fund,
  • finally, some blowback is now being heard and felt about the product introduction rate and design [note: the discontent with the connection format change and the mapping service disappointment].

So, I’d like to toss my stock chartist’s view of the “bear market” that has captured the AAPL driving it down 18% over the past two months.  Has the stock hit bottom and is it poised for a turn around (a large Wall Street firm recently called on CNBC for AAPL to more than double over the next year)?  Double it might but in the near-term it’s setting up for another 25% decline below what might be consider the neckline of an emerging head-and-shoulder top all the way down to 390 (nearly 30% from current levels).

Supporting this negative view is the long-term negative divergence existing between the trends between the two price peaks in 2012 and the comparable peaks in the OBV volume trend.  OBV indicates the relative volume between buyers (closes higher) and sellers (closes down).  In other words, as AAPL churned higher it was on less volume than those days when it closed lower.

Unfortunately, AAPL represents a large component of the major indexes so “when AAPL sneezes, the market gets a cold”.  Let’s hope that cold doesn’t turn into pneumonia.

August 10th, 2012

GOOG to 1626?

There couldn’t ever have been a more interesting and exciting IPO than the GOOG (Google).  I last focused in on GOOG back on June 12, 2007 when I wrote:

As a precursor of its novel approaches to problems, whether technical or business, August 19, 2005 was GOOG’s on NASDAQ through a little-known Dutch auction process with the stated intention of attracting a broader range of investors than the usual IPO. Almost immediately, the stock started marching to new high territory…..The Google lesson is that the best strategy (and the one taking the most discipline and guts) is to stick with this sort of stock where, regardless of external market factors (note the S&P corrections in Aug-Oct 2005, May-August 2006 and Feb-Mar 2007) is early enough in its product and business life cycle that it only suffers relatively minor retreats.”

GOOG was 511 on that date and it traded five months later at 741.  But that was the end.  Since 2007, the stock has been stuck in a multi-year trading range of approximately 433-633 (excluding its major correction during the Financial Crisis Crash of 2008 when it fell briefly to 250):

The question today is whether GOOG will join other mega-cap tech stocks and break across long-term resistances like IBM, AMZN(click on symbol for chart)?  There are only two possibilities: the horizontal channel morph into a double-top carrying the stock back to its IPO price of nearly 10 years ago (or at a minimum to near the 2008 lows) or it will cross the resistance and launch a new multi-year bull move.

I’m guessing that it’s the latter.  With all the sidelines money that is going to need to find a relatively low risk home there aren’t many stocks along the lines of GOOG with a sufficiently large enough capitalization that can absorb the money flow.  As a matter of fact, if AAPL falters on the introduction of its iPhone 5, fails to introduce a new T.V. or has some other disappointments in its product rollouts then some of the money that has been riding the AAPL gravy train when Jobs was running the company may look to GOOG to again be the tech standard bearer.

AAPL has significantly outperformed GOOG over the past 10 years but it may be GOOG’s turn to play catchup.  If the market does successfully approach and then cross into all-time new high territory then I wouldn’t be surprised to find GOOG more than doubling to 1626 over the next couple of years..

May 22nd, 2012

FB or Las Vegas? I’ll take Vegas

I was asked several times last week whether I would buy FB (Facebook) at the IPO.  Those who asked have no real concept of technical analysis or my style of trading/investing.  At its core, technical analysis is an approach to the stock market based on notions of supply and demand, of equilibrium and imbalance, of dynamic and static.  When the supply and demand situation of a stock is in balance, its price will remain within a relatively narrow range; when the equilibrium in a stock’s supply and demand is disrupted for some reason, price begins to move out of the range.  That movement begins to feed on itself, momentum is launched and that “trending” continues until supply and demand gets back into balance and a new condition of equilibrium sets in.

By its very nature, there’s no way of telling where a stock’s equilibrium will be.  We know the price that the underwriters have established as the IPO price but there’s no way of telling where the supply and demand pressures coming from the rest of the investment world work themselves out establishing a true market-based equilibrium level.  And even then, that equilibrium level price will likely be only temporary as it’s relatively easy for pent up supply and demand factors to disrupt the balance.  The process can continue for some time until all the conflicting forces work themselves out.

Traditional technical analysis tools such as moving averages, trendlines, resistance and support levels are meaningless when it comes to IPOs, even with several weeks and months of market trading after the actual IPO date.  Are you kidding me?  Is this a chart on which you can make any sort of “technically intelligent” investment decisions, whether to buy or to sell?

All the hype of the past 2-3 weeks has been nothing more than a crap shoot, a ploy to enable the underwriters to unload their stock at a price they determined the market would bear.  Anyone who bought the stock through an allocation of IPO shares was doing nothing more that putting some money down at a craps table.  One would have to be a seer, fortune-teller, medium, prophet to be able to tell whether the stock, once publicly traded, would trend higher or lower or just stay around the IPO price.  Or, you had to have so much in cash resources that you could control the price in any way you wanted.

That’s not anything that anybody who believes in the principals of technical analysis would participate in.  It’s not even interesting or exciting to watch simply because we know that within a couple of months the price will be substantially different as market momentum begins to overwhelm the underwriters and the large institutions that they enlisted through “friends and family” discounts to help them distribute the inventory of stock to the unsuspecting public.

“But where do you think the price will be by the end of the year?” I was asked.  My answer, the one I keyed into the notes app on my iPad was that “FB will have hit 15-18 sometime by the end of the year”.  Since I have no basis for that sort of prediction, I can’t short the stock or buy put options on it; I’d rather go to Las Vegas to the Blackjack table because the odds there are more readily available.  What say you though.  What do you think FB’s low will be for 2012?

May 1st, 2012

Don’t Let the Train Leave Without You

At the beginning of the year, I outlined my process for assembling an Watchlist of stocks that look like suitable candidates for purchase (see “The Challenge of Assembling a Watchlist” of January 18, 2012).  In short, the process involves running four scans that identify stocks meeting certain fundamental performance and technical momentum criteria and then manually looking at the stock’s charts to identify those that: 1) look as though they are about to cross above the apparent upper boundary of a congestion zone (either reversal bottom or consolidation chart patterns) or 2) haven’t moved too far above the previous congestion zone increasing the risk of the stock being susceptible to succumbing to a downdraft in the event of a market correction.

The market has been trapped in a very narrow trading range since mid-February and is again approaching the upper boundary in another attempt at breaking above and continuing to drive higher.  Therefore, it’s time to assemble another watchlist.

This time, using the process described above, I culled a list of 132 stocks that, in my judgement, meet the criteria.  The four scans delivered an additional 346 stocks  but most of those stocks have already had huge runs and are far above their most recent previous congestion zone.  Many of the names on the larger list of momentum stocks contains the names of stocks that are now familiar leaders; 71% have increased 10% or more since the beginning of the year while 35% are up 25% or more.  I was fortunate in having added 26 from the list to my Model Portfolio and show gains on them.

My most recent Watchlist consists of 26 healthcare, 24 tech and 30 resources and manufacturing stocks:

It’s from this list I suspect (it’s probably safer to say “hope”) that the momentum leaders in the market’s next up-leg will come.  That’s not to say that the movers since the beginning of the year won’t lead also in the next leg; I only say that if you are afraid of buying into such high fliers as AAPL and PCLN, then you can probably get some nice percentage moves in some of the new comers without at the same time suffering acrophobia.

Members have access the list and now you can also (click here).  Be prepared for the next leg higher.  Learn the price levels that signify a breakout and trigger a purchase.  Know when a stock may have run to far ahead to catch without risk.  Don’t let the market’s next move leave you standing on the sidelines watching as others make money.  Act now!

February 3rd, 2012

Launching The Next Tech Bull Market

The big news today is that the Tech sector, as represented by the Nasdaq Composite Index, crossed into territory it hasn’t seen for more than 11 years (chart below is as of noon; actual close was 2905.66).  What this means is that the average Tech stock has surpassed the previous high set before the market’s collapse in the Financial Crisis Crash of 2007-09; new highs are breaking out in many tech stocks.

With the market measured in terms of my preferred benchmark, the S&P 500 Index) having risen by more than 22% since the October low, it’s probably a great time to ask the following two questions:

  1. What does “market timing” mean (or more correctly, what do I mean when I use the term “market timing?”) and
  2. With the market having gone up so far, it isn’t the time to jump in but rather the time to take profits and exit?

I’m not sure there are any “correct” answers to these questions …. and don’t let anyone who gives you an answer tell you that it is the correct one ….. there are only opinions.  So what I’m about to offer is my opinion and the discipline I intend to follow as hopefully the market enters into its next bullish phase.

To me, “market timing” means catching the beginning of a big wave and staying on until the end.  The most fun (read “fastest, easiest gains”) is in the earliest part of the ride; the hardest, roughest part is towards the end.  Earnings are multiples higher than they were in 2000 so, with the average tech stock now reaching heights it hasn’t seen in over a decade, I’d say this is the beginning of that ride.

That’s not to say that this ride won’t hit some bumps along the way.  There probably will be a retracement back to that resistance trendline at the 2007 high sometime over the next year in the form of a “buyers’ remorse correction” as many will second guess the advance in the light of some bad news (we can’t predict what that bad news might be but the “Talking Heads” in the business news media will create a story and claim that it’s the cause).  But that, too, will pass and the market of tech stocks will continue advancing.

Within the realm of possibility is seeing the Nasdaq Composite nearly double over the next 3-4 years and test its all-time high of 5132.32 made in March 2000.  It will take determination and iron nerves but it could also be extremely rewarding if you pick and stick with the right tech stocks and, if you make a mistake, quickly cut your losses.

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December 20th, 2011

ORCL turns into Scrooge

ORCL (Oracle) could turn out to be Ebenezer Scrooge in the midst of all the joy brought on by today’s 3% move higher.  Just before Christmas, today’s market renewed the Bull’s hopes for a more positive 2012 than the year we’re completing.  If ORCL is typical, many stocks look like they spent this year’s flat market to form some really huge, compelling and emerging patterns.

What makes ORCL today’s Scrooge is that it fell 9% to 26.54 in after-hours trading.  According to Business Insider, “The company just blew its latest quarter: earnings came in at $0.54 per share (non-GAAP) on $8.79 billion in revenue. Wall Street was expecting $0.57 on $9.23 billion.”  What a difference 3 pennies can make!  It almost doesn’t matter what the company says, according to the Herd on Wall Street, “this looks a lot like a company milking its existing cash cows without signing up a lot of new customers or building new high growth businesses.”

The chart clearly shows an emerging change in Wall Street’s perception of ORCL:
The stock climbed in a clear, yet not-so-neat ascending channel since it touched bottom at the end of the Tech Bubble Crash in 2002.  However, this year was one of the few instances when a recent high was lower than the previous one making for a descending resistance trendline.  Interestingly, the after-hours close of 26.54 almost exactly touched a horizontal supporting trendline stretching back to early 2010.  (One can also easily argue that the supporting trendline slopes slightly downward making the prospective low at around 24.)  Let’s zoom in for a closer look:
It’s too early to tell whether the congestion this past year will be a consolidation pattern (e.g., a wedge) or a reversal (e.g., a double top) but what is certain is that it could be some time before ORCL again approaches the 30-35 area.  Unfortunately for the market, ORCL isn’t a unique case or exception.  As a matter of fact, it’s unfortunately all too common (see, for example, AMZN, ARUN, RHT, TIBX).

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September 28th, 2010

Tech Stocks In Parabolic Moves: When to Sell

Following up on my last post about the potential of an inverted head-and-shoulders in the NASDAQ Composite Index I took a look at a wide range of individual tech stocks across all sectors including software, semiconductors and equipment. I can’t explain it but I like it. Many of these stocks, in their attempt to make up the ground lost since their bubble burst in 2000-2003, are seeing parabolic moves.

If you were a subscriber to Instant Alerts, you may be in some these stocks by now. Here are some of the stocks we purchased, when and the amount of increase since:

With 20%+ gains in less than two months, the logical question is “When do we sell?” As difficult a rule as it it is to follow, I try to sell only when:

  • the market is going into a severe decline (that is, when my market timing indicator points to a major correction or crash) or
  • sell a small portion off because the position has become too large a percentage of your portfolio and you need to rebalance or
  • soon after you bought it but the chart failed to perform as expected for some reason or
  • you found something you think will move higher and faster but don’t have available cash so you have to sell to generate funds or
  • the company reported an underlying fundamental problem or change (like improper reporting, top management change, etc.) that causes the stock to drop.

Some investment services instruct their subscribers to sell if a stock quickly appreciates 25% or sell a portion (or in Cramer’s parlance, “schnitzel some”) when the stock hits a predetermined price objective.

I’m sorry, I just don’t subscribe with these mechanical approaches. Great stocks are hard to find. When you happen to buy one (primarily because of great looking charts, of course) and you have market tailwinds at your back, there’s no reason whatsoever to sell. If the industry sector is hot and the herd is stampeding to put money to work in it before the end of the quarter or the year, there’s no reason to sell. Why dump something you known and try to find something to put your money in that you don’t know. The only one who has a 100% certainty to make money on that trade is your broker.

If you’re a mutual fund and have hundreds of thousands invested in one stock, then it takes time for you to lighten up so you have to take incremental steps. But the average self-directed individual investor can usually unload a position merely by pressing the return key on their computer.

As individual investors, our challenge is more risk management than it is portfolio management. It’s not so much what we have our money and how diversified the portfolio than it is balancing the probability of gain against the risk of loss. The question always is: how much do we want to have at risk invested in the market at any particular time vs. having sitting safely in cash on the sidelines?

September 24th, 2010

Inverted Head-and-Shoulder Potential on NASDAQ Composite

Alert: For those who have been sleeping for the past several months, something exciting is also happening with the NASDAQ Composite Index and stocks in that market (mostly tech).

Some will say “give him a horizontal trendline and everything will look like an inverted H+S to him”. In other words, I might be criticized for stretching the case but another 6% move will bring that index up to the “neckline” making for the tantalizing prospect of a breakthrough and, after some “buyers remorse” congestion, a huge move up.

That’s when things could get really interesting. Crossing that line also represents breaking above a trendline the descends all the way back from the 2000 Tech Bubble peak, thereby signaling a new burst of enthusiasm for tech stocks.

Applying the convention of the neckline being the 50% mark between the trough and the peak, the high for the NASDAQ Composite Index could be 5000 (2500/1250 x 2500), just about back to the Tech Bubble peak in 2000.

I can hear the calls now for my being an “eternal optimist”. True this is total speculation but an enticing one, wouldn’t you say. The move up, should those stocks be able to break across the neckline, could be a dramatic and fast one when one looks at the absence of resistance on the way down in 2000-2001. The more I look at the situation, the more excited I get. Tech could be the place to have your money in 2011-2012.

Lunar Cycle Report: It’s that time of the month again, time to issue the scorecard on the Lunar Cycle for all you loonies:

This is one time I don’t mind being on the losing end of a score. Since the market moved nicely for the past couple of weeks as it barrels ahead to the 1150-1164 hurdle, the Moon’s batting average dropped to 66.7% over the previous 12 months and 67.7% since I started keeping track.

With the way market momentum seems to be expanding (at 1146, it’s excitingly close the hurdle this morning), I’d be disappointed if the next phase to October 7 doesn’t stick to script and end above yesterday’s close of 1124.83.