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.

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..

January 18th, 2012

AMGN: the ship for sailing the coming biotech tsunami

Since the beginning of the year, I’ve featured three different Industry Groups that look to have some potential including: Financials; Big Pharma; Cement, Concrete and Aggregate.  Another that has been in the top of the rankings for at least the 18 months is the Medical-Biotech Industry Group.  Two ways of measuring the group’s performance is through the its ranking according to IBD and the other is an ETF.

Medical-Biomed/Biotech has consistently been among the top 100 (out of 197).  Since last April, the group has ranked among the top 40 and last week, it ranked third.

Another picture of the stock performance of the group is available through the BBH (Holders Biotech) etf:The ETF is a composite of a large number of biotech stocks and, therefore, some individual stocks have performed better and some worse than that average.  Just recently, the group crossed above long-term resistance and moved into new all-time high territory.

According to PharmaPhorum, AMGN (Amgen) is:

“the biggest biotechnology company in the world, but its plush headquarters, global reach and tens of thousands of employees belie its humble origins. Founded in 1980 as Applied Molecular Genetics, it initially resembled the type of Californian start-up more common in the computer industry than the traditional big pharma behemoth. Much like the straightened origins of Apple or Microsoft, Amgen combined a relaxed attitude with determination and flexibility in dealing with limited resources…..Amgen’s innovative and flexible approach seems to be continuing into the new decade; it is widening its research to include small molecules as well as the more traditional biologicals, and it retains one of the highest ratios of R&D spend to income of the Fortune 500 companies. Biotechnology certainly promises many discoveries for the future, and Amgen will surely be as key a player in the next 30 years as it has been in the last 30.”

Stocks like AMGN are the sort that appeared to be at the end of one stage of their life cycles and there are questions as to whether they can be “reborn” and launch into a new life cycle of growth.  Apple went through just that until 2004 but then, through Steve Jobs leadership, it launched iTunes and iPods; the AAPL stock had been caught in a range but the introduction of those products launched it into a new life cycle.  The past twelve years has been anything but profitable for AMGN investors: But the stock is now again on the verge of breaking out of the channel in which it has been trapped since 2000.  A move above 70-75 would clearly signal the launch of a new life cycle move.  Smaller stocks in the industry are already moving higher and represent precursors of that tsunami; AMGN could be the steamship on which you may want to sail that wave.

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January 6th, 2012

Is the Secular Bear Market Close to Ending?

A recurring theme among some reporters and bloggers is the possible breakout of the mega-caps.  I believe one cause for this line of reasoning is the persistent dream of an end to what is now the 12th year of the secular bear market.  A name that continues to come up as emblematic of this breakout thesis is WMT (Walmart).  Any stock chart aficionado salivates over the potential of a stock like WMT.  When stuck in a horizontal trading range for over 10 years there’s the potential of a huge move should a breakout above that huge wall of resistance is ever successful:

But WMT isn’t the only large-cap stuck in the secular bear market trap.  As a matter of fact, half of the 30 Dow Industrial stocks are below where they were on December 30, 1999 (WMT is down 12.8%). There are a number of large-cap stocks not part of the DOW that also have charts that have attractive potential should they break above their own multi-year resistance levels:

  • MSFT (Microsoft)
  • AMGN (Amgen)
  • QCOM (Qualcomm)
  • DIS (Disney)

What we’re all waiting for are stocks to breakout like IBM because when more do, we’ll be certain that the 12-year secular bear market will have ended:

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