All About the Brightest, Tastiest Fruit of Them All … Apple!

All About the Brightest, Tastiest Fruit of Them All … Apple!

Apple (AAPL) is obviously the most systemically important company on the planet today. The bull market over the past couple of years has been predicated on two very clear factors, one is quantitative easing by the Fed and the other is Apple continuing its meteoric success. Take one or the other away and we have to ask much different questions in order to formulate an investment opinion in the current market.

The Fed has promised QE for as long as is needed

This action has masked some real “sins” in today’s market while the Fed’s “grand experiment” unfolds. With this onslaught of liquidity, anybody managing money has bought shares of the most hyped (for good reason) company in the history of companies! The growth in Apple’s market value over this year alone is staggering and generally speaking its success is also based on two factors.

The first is the fact that the company puts out great products that everyone wants to own and the second is that it has been one of the better managed corporations in modern financial history. Add beta chasing liquidity to the mix and you have an explosive combination.

Recently the stock has faltered.

It is down nearly 10% from its high of the year and some are rightfully questioning its staying power. The launch of the iphone 5 has been lackluster (from the perspective of what we expect from Apple) and there have been some technical gremlins which are unusual for this company. For traders, even for traders who do not trade AAPL (me) the performance of this stock is crucially important because of its weighing in the broad indices and the impact that this company has on peripheral names, those companies whose business model is dominated by supplying Apple with components and services.

My take is that if Apple doesn’t work in the current market environment, the market in general doesn’t work. Like I mentioned above, the bullish thesis here is a double pronged spear, take one out and the other falters. It won’t be the case forever, but it is the case now.

Looking at a price chart of Apple

reviewing the past couple of years of price action, there is a clear pattern of sharp pushes higher followed by periods of choppy consolidation or as some call digestion. These have invariably been periods where weaker hands handed over shares to stronger hands at lower prices only to see sharp continuations of the upward momentum move. Nothing wrong with this action whatsoever.

Those trading, speculating on short term moves will be much less tolerant of price swings against them and are going to be the first out the door. That is trading 101. Those with a longer timeframe will revert to the fundamental argument that Apple stock is “cheap” and use weakness to build positions.

Since 2011 we have had 8 such periods where shares changed hands, from weak to strong, in this profit taking/shake out action. All eight times the stock managed sharp rises while trying to lasso the runaway train and catch the corrective downturn has been difficult (putting it mildly).

We are at another important juncture with Apple.

There are many questions regarding the potential for a more structural change in the fundamental outlook for Apple and end of year profit taking from those managers heavily invested in the name is a strong possibility. So far I don’t see it. There has been very little selling pressure in the name beyond what we would characterize as normal profit taking by small specs. From a quantitative perspective, the stock has not traded beyond 2 standard deviations from its 40 day moving average for very long before a sharp reversal.

Could this be the “IT” moment? Of course it can, but it has been an unwise bet for some time and in my opinion one that has major implications for the broad market.




Market- “Sterilized, Conditional and Unlimited ECB Bond Buying Program”

Market- “Sterilized, Conditional and Unlimited ECB Bond Buying Program”

I had high hopes for today’s ECB announcement and I was disappointed that Mario Draghi and the ECB central bankers chose to use a sterilized bond purchase plan and failed to lower rates. A sterilized purchase plan, particularly one that is conditional, even if “unlimited” in size, is basically taking from “Peter to give to Paul”. Because they are not expanding their balance sheet, the ECB is basically going to divert funds away from the performing countries to support failing ones.

The German courts will decide on the legality of the ESM (European Stability Mechanism) in the next week or so. I am not an Economist nor do I play one on TV but in my humble opinion, the EU needs to allow the ECB to expand their balance sheet. Europe needs growth and they need both monetary and fiscal actions that support economic expansion. To tie these emergency efforts to austerity is not going to help get these economies moving which is what is desperately needed across the European continent .

The market’s initial reaction primarily focused on the words “unlimited” and “bond buying” and risk assets took off to the races. I had anticipated this initial reaction yesterday and reason why we added the bullish call spread on the DIA and It may very well be that we rally for a couple of days. The mega caps of the DOW should outperform if that is indeed the case. The weaker shorts are covering positions in mass today and it remains to be seen if there is some “buy in” from investors over the next few days. From a technical standpoint, I still think there may be some downside ahead before the next major leg higher.

We have not made a test of support at the bottom rails of this channel since early August and we are very much short term overbought with the SPX well within 3 standard deviations above its 40 period MAs on the hourly charts. It remains to be seen if the “conditional” and “sterilized” terms which in my opinion are bearish aspects of the ECB announcement, get some more play over the next couple of sessions.

Headlines abound with the NFP (Jobs report) out tomorrow, the Fed next week along with the German court decision on the legality of the ESM which could theoretically put all of today’s gains in question. Tomorrow’s NFP number is expected to come in at around +120,000 jobs. Again it is very much a day by day market as traders react to the headlines “du jour”.



Markets – Technicals, Volume, Participation and Complacency Do Matter

Markets – Technicals, Volume, Participation and Complacency Do Matter

August is behind us as is the summer trading season and for 2012, instead of a summer crash, Mr. Market brought us a low volume and low volatility rally. The trading action evolved into a neat trading channel from the lows put in on June 4th through the recent highs put in on August 21st. The one standard deviation regression channel on the chart below tells the story best as we have traded within it for nearly three months now. The narrowing of volatility towards the end of the month really kept the trading action compact and since early August, exclusively above the midpoint of the channel which was only broken again over the past couple of days.

The market should again straddle the 1400 SPX and 13000 Dow levels going into a short holiday week full of economic headlines. The biggie obviously will be what the ECB brings to market to deal with the run on sovereign bonds of countries such as Spain and Italy. These nations cannot endure such high rates for much longer and are in dire need of a bailout. We have already begun to get some details and it seems that the ECB will be buying short term bonds of these nations to keep short term borrowing costs low. There are many hurdles to overcome as the legality of this program will be challenged particularly by the Germans. The details of what these countries are going to have to “give up” to get this ECB assistance is still a huge murky subject . Presumably we can expect the ECB to ask for “the first born” and it remains to be seen if Spain and others are willing to give up so much control. As was the case with the Fed last week, we seem to find “balance” at the 1395 to 1403 level in the broad market SPX going into these headlines.

This weekend and into today we got a very clear look at the ever slowing global growth picture. Pretty much across the board, the economic data is pointing to a pullback in manufacturing. Not exactly what the market wanted to see heading into September… or is it?… The slowing pace of manufacturing should make the case for easing that much more clear for the Fed and ECB which should (in today’s upside down market) be interpreted as bullish for risk assets. Well, today at least, markets are looking at the data very cautiously and perhaps positing that the central banks are behind the curve here as the slowing global economy has picked up some steam to the downside.

The recent global economic data does not portend well to upcoming Q3 corporate earnings season. There appears to have been a strong slowdown in economic activity over the past couple of months and clearly these will be reflected in the upcoming earnings cycle. Over the next few weeks, I expect quite a bit of analysts to come in and adjust earnings expectations lower for the quarter and for year-end.

So, in the very near term, I am still bearish. Not as bearish as I was at SPY 143.09 on August 21st but I think we are certainly headed lower within this established trading pattern to test supports at SPY 137.50 and slightly higher. Where we go from there really depends on very precise binary outcomes to some of these upcoming headlines so to speculate too far ahead at this moment would be just that, speculation.





Markets-Talk Of The Death Of QE Is Premature

Markets-Talk Of The Death Of QE Is Premature

Talk about the death of QE is premature. Lots of chatter today on the financial media channels about the diminishing likelihood of additional stimulus measures by the Federal Reserve and the reason for this is that there has been some very minor improvements in a few of the economic data points of late. Here is why I think the Fed will go ahead with further easing at some point over the next couple of months if not at their next scheduled meeting of the FOMC in Sept.

The Fed operates under a dual mandate, price stability and full employment. The troublesome issue for Bernanke is that employment has been stubbornly high and, according to his views on these matters, the only tool on their tool belt to deal with this issue is to ease further. Although fiscal policy would better address employment concerns, he is well aware that fiscally, we may be in paralysis for the remainder of the year.

The Fiscal cliff should be one heck of a standoff later in the year and it threatens to create such anxiety that unless they (the Fed) resolve to do something now, the economy may very well come to a screeching halt. The recent peek at inflation shows that based on the criteria used by the Fed, we have very little current inflationary pressure to deal with which opens the door for the Fed to consider additional stimulus.

The one upcoming factor that could materially change my opinion on this would be if the Aug non-farm payroll report came in much stronger than anticipated. That could very well put the Fed on ice for the next couple of months although I am not of the opinion we are going to see a significant pick up in hiring.

Another point to consider here is that I would be very surprised if the Fed did not coordinate intervention with the ECB and the ECB seems much more poised to act in the near term. Again, it is not a matter of right or wrong, it is just a matter of trying to anticipate what is the most likely action out of the Bernanke led FOMC and their cohorts overseas.

A couple of points on the VIX as there seems to be some confusion as to what exactly does a cash VIX print below 15 mean. Is it bullish on is it bearish? I mentioned before that a single days print on the VIX does not do a good job analyzing the level of fear of participants unless you also consider the near term trend. If you take a look at the weekly chart below of the VIX (blue) it is clear that the “trend” lower from higher levels has meant a rising market but also that the sub 15 level has signaled some important tops in the market for the past several years.

This is factual and plain to see. Could the VIX push lower here while the market trades higher? Sure it can, but much upside from here based on this metric alone is much less probable based on how this index has influenced the price action of the S&P 500 over the past 4 to 5 years.

So why do these “low” relative levels signal trouble for equities? Basically these are levels where generally the market has become overly complacent to risk. Complacency is expressed by participants taking off hedges and exposing portfolios to more directional risks in order to capitalize on the rally. Look at it this way.

If you are properly hedged whether via being long/short positions or simply hedging via options, you are not likely to run to the exits at the first signs of trouble because your hedges (hopefully) will offset some of your long bullish exposure allowing you more time to weather the storm. If you are not properly hedged and an event or catalyst of some sort hits the market (usually overnight), you will probably not be able to hedge portfolios quickly enough and will opt to head for the exits much quicker even with core positions. A complacent market is dangerous because of the type of reaction (quick trigger finger selling) it usually engenders when things begin to turn sour.

The market is complacent here because of the expectations of the FED easing. Like I mentioned above the likelihood for more QE is great but if it does not materialize in September, the market may be poised for a swift but relatively shallow drop.


Coiled Spring Ready To Snap

8/13/2012 5:48:15 PM

The market is set up for an outsized move in either direction. The VIX has collapsed and the narrowing trading ranges for the past 2 weeks point point to a tightly wound market which like a spring, will snap strongly to the path of least resistance. The VIX at this level (below 14)has been a solid bearish signal for 4 years now.

The hourly chart below is of the SPY for the past 3 months and shows some of what I mention above. The SPY touched the top of a trading channel range but instead of immediately pulling back, it has digested the previous move over the past couple of weeks basically going nowhere.

What jumps out from this chart is the very narrow bollinger bands which as I mentioned, is a clear signal that directional pressure is building in the market place. The implosion of the VIX which now is printing at 13.70, supports this notion of a market ready to “wake up” once again. If we look at the second chart below, we notice one very important factor. My volume histogram has not “confirmed” and by confirmed I mean that it has been atypical of the past several higher highs on the SPYs. The volume histogram (as per my settings) has been well correlated to the price oscillator peaks which clearly shows internal churning and rotation becoming ever more focused on the “heavier” mega caps for the price momentum we are seeing as opposed to a broader based advance. Makes perfect sense as participants want to take profits out of the “secondary” and “terciary” names into the most liquid, “first string” names (AAPL, GOOG, XOM etc) as we trade to the top of the trading channel.

The power of the mega caps pushing markets higher even without the participation of the broader market secondary names is very real and we don’t have to go too far into the past to confirm this. Apple single handedly proppeled the NDX and SPX higher during the 1st and 2nd quarters of this year. With a new iphone product cycle around the corner, we have to be aware of this dynamic and remind ourselves that we have “seen this movie before”.

Should we breakout, the action should take us at least to challenge the highs of the year at 142.21 and still be within the current trading channel. A breakdown takes us down to 138.42 initially and possibly as low as 137.00 before support kicks in. In my opinion, we will breakdown to support on this trading channel here as opposed to a breakout above it although as I mentioned, the S&P500 can move to 1422 and still be well within this current pattern.

C.J. Mendes


Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143


Small and Nimble

Tuesday, July 24, 2012

We are trading at that support rail on the uptrend channel. SPX 1335 is where we should see some support, where the bulls hash it out with those bears willing to put money behind their thesis. The scale will be tilted either way with Apple’s earnings announcement today as well as several other heavyweights set to report earnings this week such as Exxon and Chevron. These 3 companies represent close to 10% of the S&P 500 weighing so any under or outperformance in these names could add or detract substantially from this weighted index’ performance.

With Apple on deck, shorting this market here at support is the most speculative of the three options available to participants. Less speculative is to remain long the bullish trend at support and the most conservative obviously is to be flat. I say with Apple on deck because of the experience we have had with Apple post earnings. While they certainly may not repeat the Q1 blowout, their historical record on earnings is pretty solid. If we consider the derivative companies that piggyback on the Apple boom we can safely say that to be short the market for a trade at this point one has to have a bearish view on Apple which is perhaps the most counter trend position a trader can take these days. A poor showing is definitely possible and we all know the peripheral issues plaguing the market. What I am saying is that it is a “counter trend position” and should be considered appropriately.

With the Fed on deck in around a week, shorting the market here is also “a fight the Fed move”. Again could be but should be considered in this context. Also, and I promise my last market cliché for the day, is market sentiment which is has been extremely bearish. This also should raise a caution flag as the market rarely does what most expect it to do.

A very poor showing for Apple and the other companies set to report this week along with a breach of the last set “higher low” on the broad market SPX would all throw our short term thesis up in the air for review as the technical and fundamental thesis for a continued short term bounce higher would be greatly diminished.

C.J. Mendes


Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

At Support, No More, No Less…

Ugly overnight session in Asia and Europe followed through to the US futures action and the open. The hype took markets down nearly 250 on the DOW before a pretty violent turnaround took back nearly 125 points off of the lows at 11:00 AM EST. The economic headlines out of Europe are well known to traders and investors and anyone who has a bullish view on the economic situation in Europe here should really have their heads examined. The economic situaiton in Europe will be hampered by credit related issues for many years to come. In my time doing this, I can’t remember a more readily analyzed and discussed topic as the European debt crisis. The fact is that markets do not fall off a cliff when that cliff is clearly demarcated ahead. The reason for this is that corporations, those same pesky institutions whose businesses back your favorite stocks, have adjusted their businesses to reflect this reality. The most pleasant surprise of the past 5 years has been the resilience of corporations and their ability to adapt to the changing landscape. This certainly has been influenced and brought about by massive easing but in the end, it is what it is and is something that many many traders and investors seem to discount and doubt.

I am not a long term bull on the economy and actually may actually consider myself a bear in that regard. To be longer term bullish the U.S Economy here is foolish but to equate that economic underperformance 100% to stockmarket performance today is not only dangerous it is a losing $ proposition. The poor economy is a major headwind for corporations as are the issues in Europe but they are not the main driver of corporate profits.

For trading purposes the above is not nearly as important as it is for those take a much longer view of markets. We trade them up and we trade them down. The current trend has been higher since the market managed a higher high on June 11th from the low set June 4th. The broad SPX has made 3 further higher highs since then as well as three consecutive higher lows. No matter what your discipline, this is a short term bullish trend. This bottom support trendline on this bullish regression channel of around 1.5 standard deviations is currently being tested and it so far has done what we would expect it to do. The broad market as represented by the SPY chart below has almost on cue held this regression.

Overall volume is still unimpressive but it has been unimpressive for several years now. Breadth was certainly bearish this morning and within the low participation perspective, traders and investors sure seemed eager to sell stocks. The issue is that most of the selling seem to be coming from retail. Lots of weak hands transferring stocks to stronger hands…

C.J. Mendes


Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143