Long-term readers of this letter are well aware of my pleadings with them a couple of years ago to buy Apple (AAPL) stock at $250 with a target of $1,000. Certainly, the 200 readers who work for Apple noticed. ?That was back when the main concern about the company was that Steve Jobs would die young.
In view of the upgrades present in the iPhone 5 announced today, I am going to have to raise my long term target for the shares to $1,600. ?And it could achieve that lofty price in as little as two years.
First, the specs: The new iPhone will be thinner, faster, and lighter, with a longer battery life. ?The new phone is a paper thin 7.6 mm thick and weighs 112 grams, 18% thinner and 20% lighter than the model 4s. ?The screen gains ? inch to 4 inches in able to accommodate a full HD format.? The new A6 processor is twice as fast as the old one. ?It offers full 4G LTE connectivity to handle wireless video. Talk time is extended to 8 hours, and 10 hours for web surfing. ?The camera jumps to a near professional 8 megapixels. ?In short, it is head-and-shoulders above any potential competitor.
You can preorder the phone from Friday. ?Some analysts see 50 million phones shipping in the next quarter and 170 million in all of 2013, generating 85% of the company?s total revenues. ?The order flow is expected to be so massive that economists think it could add as much as 0.3% to US Q4 GDP.
Apple is the ultimate value play. ?Looking at the forward financials, the stock is still astoundingly cheap, despite a 70% gain so far this year. ?It is selling at a bargain basement 11X 2013 earnings ex-cash. It has a dividend yield of 2%, no debt, and is growing at 15% a year.
By comparison, the S&P 500 is growing at 5% a year at best, offers a dividend yield of less than 2%, has debt of 35% of capital and sells at a 14X multiple. ?In other words, it is more expensive, slower growing, yielding less, with fewer assets backing the shares. ?Why anyone looks at other stocks than Apple is beyond me.
On top of this, Apple has a cash mountain of $120 billion which is growing at a prolific rate, and it has a fantastic lineup of new products in the pipeline. ?The recent Samsung patent win will do a lot to scare away potential competitors. ?The franchise value of the company is huge.
You can also throw in the longer term arguments for the company that I have made before. ?After being shunned for decades, Apple products are now in the process of going mainstream corporate. ?A future China deal will give it access to 600 million new subscribers there. ?Any other new products on top of the iPhone 5, like Apple TV, an iPad mini, or enhanced iPods, will just be cream on the cake.
The trick is how to buy the stock, as it has been all year. ?We seem to get one 20% dip a year, as we saw in April this year and October, 2011 ? usually around an earnings disappointment or a generalized market selloff. ?Use the next one of these to load the boat. ?This is the stock you sock away for your kids? college educations or your own retirement, as I have done.
Steve Jobs would be smiling.
Nice Job, Steve!
https://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-09-13 02:37:302012-09-13 02:37:30Raising My Apple Target to $1,600.
When communications between intelligence agencies suddenly spike, as has recently been the case, I sit up and take note. Hey, you don't think I talk to all of those generals because I like their snappy uniforms, do you?
The word is that the despotic, authoritarian regime in Syria is on the verge of collapse, and is unlikely to survive more than a few more months. The body count is mounting, and the only question now is whether Bashar al-Assad will flee to an undisclosed African country or get dragged out of a storm drain to take a bullet in his head a la Gaddafy. It couldn?t happen to a nicer guy.
The geopolitical implications for the U.S. are enormous.? With Syria gone, Iran will be the last rogue state hostile to the U.S. in the Middle East, and it is teetering. The next and final domino of the Arab spring falls squarely at the gates of Tehran.
Remember that the first real revolution in the region was the street uprising there in 2009. That revolt was successfully suppressed with an iron fist by fanatical and pitiless Revolutionary Guards. The true death toll will never be known, but is thought to be in the thousands. The antigovernment sentiments that provided the spark never went away and they continue to percolate just under the surface.
At the end of the day, the majority of the Persian population wants to join the tide of globalization. They want to buy IPods and blue jeans, communicate freely through their Facebook pages and Twitter accounts, and have the jobs to pay for it all. Since 1979, when the Shah was deposed, a succession of extremist, ultraconservative governments ruled by a religious minority, have failed to cater to these desires
When Syria collapses, the Iranian ?street? will figure out that if they spill enough of their own blood that regime change is possible and the revolution there will reignite. The Obama administration is now pulling out all the stops to accelerate the process. Secretary of State Hillary Clinton has stiffened her rhetoric and worked tirelessly behind the scenes to bring about the collapse of the Iranian economy.
The oil embargo she organized is steadily tightening the noose, with heating oil and gasoline becoming hard to obtain. Yes, Russia and China are doing what they can to slow the process, but conducting international trade through the back door is expensive, and prices are rocketing. The unemployment rate is 25%.? Iranian banks are about to get kicked out of the SWIFT international settlements system, which would be a deathblow to their trade.
Let?s see how docile these people remain when the air conditioning quits running this summer because of power shortages. Iran is a rotten piece of fruit ready to fall off its own accord and go splat. Hillary is doing everything she can to shake the tree. No military action of any kind is required on America?s part.
The geopolitical payoff of such an event for the U.S. would be almost incalculable. A successful revolution will almost certainly produce a secular, pro-Western regime whose first priority will be to rejoin the international community and use its oil wealth to rebuild an economy now in tatters.
Oil will lose its risk premium, now believed by the oil industry to be $30 a barrel. A looming supply could cause prices to drop to as low as $30 a barrel. This would amount to a gigantic $1.66 trillion tax cut for not just the U.S., but the entire global economy as well (87 million barrels a day X 365 days a year X $100 dollars a barrel X 50%). Almost all funding of terrorist organizations will immediately dry up. I might point out here that this has always been the oil industry?s worst nightmare.
At that point, the US will be without enemies, save for North Korea, and even the Hermit Kingdom could change with a new leader in place. A long Pax Americana will settle over the planet.
The implications for the financial markets will be enormous. The U.S. will reap a peace dividend as large, or larger, than the one we enjoyed after the fall of the Soviet Union in 1992. As you may recall, that black swan caused the Dow Average to soar from 2,000 to 10,000 in less than eight years, also partly fueled by the technology boom. A collapse in oil imports will cause the U.S. dollar to rocket.? An immediate halving of our defense spending to $400 billion or less and burgeoning new tax revenues would cause the budget deficit to collapse. With the U.S. government gone as a major new borrower, interest rates across the yield curve will fall further.
A peace dividend will also cause U.S. GDP growth to reaccelerate from 2% to 4%. Risk assets of every description will soar to multiples of their current levels, including stocks, junk bonds, commodities, precious metals, and food. The Dow will soar to 20,000, the Euro collapses to parity, gold rockets to $2,300 an ounce, silver flies to $100 an ounce, copper leaps to $6 a pound, and corn recovers $8 a bushel. The 60-year bull market in bonds ends.
Some 1 million of the armed forces will get dumped on the job market as our manpower requirements shrink to peacetime levels. But a strong economy should be able to soak these well-trained and motivated people right up. We will enter a new Golden Age, not just at home, but for civilization as a whole.
Wait, you ask, what if Iran develops an atomic bomb and holds the U.S. at bay? Don?t worry. There is no Iranian nuclear device. There is no real Iranian nuclear program. The entire concept is an invention of Israeli and American intelligence agencies as a means to put pressure on the regime. The head of the miniscule effort they have was assassinated by Israeli intelligence two weeks ago (a magnetic bomb, placed on a moving car, by a team on a motorcycle, nice!).
If Iran had anything substantial in the works, the Israeli planes would have taken off a long time ago. There is no plan to close the Straits of Hormuz, either. The training exercises in small rubber boats we have seen are done for CNN?s benefit, and comprise no credible threat.
I am a firm believer in the wisdom of markets, and that the marketplace becomes aware of major history changing events well before we mere individual mortals do. The Dow began a 25-year bull market the day after American forces defeated the Japanese in the Battle of Midway in May of 1942, even though the true outcome of that confrontation was kept top secret for years.
If the collapse of Iran was going to lead to a global multi-decade economic boom and the end of history, how would the stock markets behave now? They would rise virtually every day, led by the technology sector, offering no substantial pullbacks for latecomers to get in. That is exactly what they have been doing since mid-December. If you think I?m ?Mad?, just check out Apple?s chart below.
https://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-09-03 23:02:572012-09-03 23:02:57Here Comes the Next Peace Dividend.
Steve Jobs? creation dropped a real bombshell on the market Tuesday when it announced Q2, 2012 earnings that were rotten to the core. The timing could not have been worse for a market that was on the verge of complete nervous breakdown. Of the 53 brokers who provided research coverage of the Mountain View, California firm, 27 rated it a ?buy?, 21 ?outperform?, and precisely zero ?underperform?. And you wonder why retail has bailed on Wall Street.
The numbers made grim reading. Sales, which had been targeted at $37 billion came in at only $35 billion. Profits amount to $8.82 billion, taking earnings per share to $9.32, well down from the $10.37 expected. Estimates for iPhone sales had run as high as the low 30 millions. The actual figure was 26 million. In overnight trading, the shares opened down a gob smacking $40, instantly vaporizing $37 billion in market capitalization.
Apple is suffering from the mother of all delayed consumption headaches. Consumers love their products so much they have gone on strike until the vastly upgraded and better performing iPhone 5 is launched in the fall, yours truly included. So the dip in profits will reappear as a spike in profits in the next one or two quarters. This means that if you missed the 50% run up since the beginning of the year, you may have a chance to take another bite at, well, the apple.
Apple is not just an iPhone story. The mini iPad is expected out soon. Apple TV is expected to be huge next year. Apple has only just scratched China?s market of 600 million cell phone users. Its six stores are regularly the scene of long lines, and occasional riots by consumers desperate to buy their products. Droves are crossing the border by train from Shensen to Hong Kong, where Apple products are more easily available.
In the spring I lead readers into the August $400-$450 call spread which became one of our most profitable trades of the year. I took them out a month ago because we had already squeezed out most of the profit, and because I thought that exactly this kind of disappointment might occur.
The intelligent thing to do here is to wait for the current shock to work its way through the system. You also want the present melt down in the broader market to exhaust itself. That could take us well into August. The best-case scenario here is that you get back in when the stock falls all the way down to its June low at $525. If it then drops below $500, double up. This would be a once in a lifetime gift.
If you are cautious, you will then want to put the $400-$450 (AAPL) call spread back on with a January 2013 expiration. The more aggressive could roll up to the $450-$500 call spread. Or you could just buy the stock outright for longer-term accounts. All of the arguments that I made two years ago that the shares were headed for $1,000 are still valid (click here for the link).
https://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-07-25 12:13:462012-07-25 12:13:46Apple Just Gave You a Gift
I am getting a lot of emails about how to come out of the $450-$480 Apple bull call spread, which I advised readers to go into on March 2. Now that we are deep in the money, what is the best way to take a profit?
Well, the first thing for me is to say congratulations. My expectation that Apple stock would continue grinding up has paid off handsomely. The entire position expires next week, on April 20. So the best thing to do here is nothing. You are so far in the money that you are almost certain to expire at the maximum profit point.
So just leave it alone. You don?t have to do anything. The $450 and $480 calls will cancel out each other, and your broker should post a cash credit to your account the following Monday, thus freeing up the margin requirement.
If you try to come out here the execution costs could unnecessarily eat up a chunk of your profit. Since there are two call options involved, that means paying a double trading spread. There is no need for you to pay for a bigger yacht for your broker this early in the year.
The only reason to come out earlier is that you think Apple might fall $150 in the next seven trading days. Given that the Justice Department announced an antitrust action against the company this morning an only knocked the stock down $10, I think this is unlikely.
Your net profit on this position should be $1,855, or? $1.86% for the notional $100,000 portfolio. I include my calculations below. Well done.
March $450 call cost?????... $97.60 March $480 call premium earned?-$70.25
Total profit = ($2.65 X 100 X 7) = $1,855 = $1.86% for the notional $100,000 portfolio.
https://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-11 23:02:332012-04-11 23:02:33Taking profits on Apple
Last week saw a dramatic deterioration in the economic data that has been the foundation of the Great Bull Market of 2012.
First, we read minutes from a Federal Reserve meeting suggesting that QE3 has been put on a back burner. Then the Department of Labor?s Friday nonfarm payroll report poured gasoline on the fire, coming in at 120,000, versus an expected 210,000. Until this week, the best you could say about the data flow was that it was mixed. Now it is decidedly negative.
Whenever we see sea change events like this bunch up over a short time period, I like to show readers my cross asset class review, which I conduct on a daily basis. This discipline is great at showing which securities are trading in line with the rest of the world, and which ones aren?t. And guess what is looking outrageously expensive right now?
The charts show that trouble has in fact brewing for a few months. Asset classes have been rolling over like a line of dominoes. This is the way bull markets always end, and this time should be no different.
The Australian dollar (FXA) saw the weakness coming first, which peaked on April 6.
The Australian stock market (EWA) followed, peaking on February 28.
Copper (CU) warned that trouble was coming, peaking on February 12.
Then Gold (GLD) faded on April 12.
And Silver (SLV) on February 28.
Bonds never bought the ?RISK ON? on scenario. The ten year Treasury ETF (IEF) is down less than three points from its 2011 peak, instead of the 15 points we should have gotten if the economy had truly entered a sustainable stage in the recovery.
Only equities (SPX) didn?t see ?RISK OFF? coming
Because it was all about Apple (AAPL), which added $225 billion in new market capitalization this year. That amounts to creating the third largest company from scratch, right after Exxon (XOM).
The final message of all of these charts is that equities alone have been powering up for months while every other asset class in the world has been dying a slow death. Experience shows that this only ends in tears for equity holders. I?ll let you adjust your own positions accordingly.
https://www.madhedgefundtrader.com/wp-content/uploads/2012/04/aapl-14.png530700DougDhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-08 23:03:582012-04-08 23:03:58Cross Asset Class Analysis Warned ?RISK OFF? Was Coming
When Apple (AAPL) made its three day, $50 move up last week, it created $55 billion in new market capitalization. That 72 hour addition alone would rank it as the 100th largest company in the world besides Boeing (BA), Union Pacific Railroad (UNP), and Nike (NKE). Trading volume in Apple calls is has smashed all records. The action has been more frenzied than seen in any single name since the height of the dotcom bubble 12 years ago.
I tried to take a bite out of Apple, selling 20% deep out of the money, front month calls. It looked clever for exactly two weeks. Instead, Apple took a bite out of me. When the appreciation suddenly accelerated on no news specific to Apple, implied volatility for the options popped from 30% to 40% in an hour, and I got stopped out.
Moves like this are unprecedented in the history of the options market. I know people who are doubling their money every week, buying out of the money Apple weekly calls, and rolling their way all the way up, knowing full well that their last trade will result in a total loss.
So that got me to thinking. Is the greatest shorting opportunity of the year setting up here? I started playing around with some numbers when Steve Jobs? creation hit $600 a share yesterday. I looked at the April, 2012 put series, which expire in 25 trading days, on April 20. Then, the $500 puts were trading at $2.00. What would happen if the stock fell? I did some back of the envelop calculations and came up with the following:
I thought ?well, that?s pretty interesting?, and set to write up a Trade Alert to buy the $500 puts. But by the time I finished writing it, Apple fell $25 and the puts doubled. I missed the entry point so I decided to wait.
I love Apple stock, and it now looks like it will hit my long term $1,000 target sooner than later. I have been filling up my house with Apple gadgets as fast as I can, like everyone else, picking up an iPhone, a MacBook Pro, and a MacBook Air. The ecstatic people on TV this morning piling into Apple stores at the crack of dawn to buy the new iPad behave like they?re just won the lottery.
But I also know what a parabolic stock move looks like on the charts, and I have never seen them end in anything but tears. At some point they end, falling back down to a trend line, even if that trend remains up. The volume on the downside is even greater than on the upside. I image that quite a lot of the recent buying has been on margin or with huge leverage. Apple stock is cruising for a bruising, and no one would be surprised to see a sudden $100 sell off.
I?ll tell you when to put on this trade. Wait for the next three day, $50 spike, and then commit 1% or 2% of your capital, no more. You are looking to risk 1% to make 10%, not 100% to make 1,000%. I frequently get resumes from those who tried the later and are now unemployed, and believe me, you don?t want to try this.
Of course, it is possible that the final $50 spike is behind us, in which case this entire discussion has been academic. But it is still a good exercise to carry out to learn what is possible. And since St. Patrick?s Day is upon us, you might want to down a quick shot of Irish whiskey first, neat, if you end up doing the trade.
Sign of a Top?
https://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-03-18 23:04:482012-03-18 23:04:48Is an Apple Short the Trade of the Year?
If you feel like this market has sucked you down a rabbit hole, you have plenty of company.
I have never seen such a profusion of contrary cross market indicators. Traders are running up shares prices while companies are cutting earnings forecasts. Economists are raising GDP forecasts as rising energy prices are taking them the opposite direction. Natural gas is crashing as oil spikes up.
The bond market has gone catatonic, with billions pouring into bond mutual funds to keep them on life support. Dr. Copper, that great leading indicator of global economic activity, has gone to sleep, with investors pouring money into the entire spectrum of risk assets. An increasing share of the buying in equity markets is focusing on a single stock, Apple (AAPL), the world?s largest company.
They say the market climbs a wall of worry. This one is climbing the Great Wall of China. You have to assume that the people buying stocks here are doing so only for the very long term, Warren Buffet style, and are willing to look past any declines we may see this summer. They don?t care if the market drops 5%, 20% (my pick), or 50%.
In my new year Annual Asset Class Review I thought that markets might peak in January. I lied. Thanks to a global quantitative easing program, it is increasingly looking like 2012 will be another ?sell in May and go away? year, the fourth in a row. You might as well book that Mediterranean super yacht, the beach house in the Hamptons, or the bucolic chalet in Switzerland now to beat the rush.
Another ?looking glass? element this year is the extent that last year?s dogs became this year?s divas. Just look no further than Bank of America (BAC), which did a 67% swan dive in 2011, but has soared a blistering 51% this year. This is a stock with a PE multiple of 812 and more investigations underway than Al Capone every saw.
It goes without saying then that those who did terrible in 2011 are looking like stars today. Look no further than hedge fund titan John Paulson, whose flagship fund was down 50% at the low last year, thanks to a big bet on financials. This year it appears his super star status is restored. Other funds that made big bets last year on European stocks and sovereign bonds have been similarly revived. If MF Global had only lasted two more months, John Corzine would be looking like a genius today, instead of a goat.
When I realized that this could be a ?dogs of the Dow? year with a turbocharger, I quickly reviewed by own money losing trades in 2011. That prompted be to rush out but puts on the Japanese yen, which doubled in short order, and haven?t looked back since. Now you really have to ask the question, will my other 2011 losers perform similar turnarounds? What?s at the top of the list? The (TBT), my bet that long term Treasury bonds would go down, which inflicted my biggest hickey last year.
By the way, I?m kind of liking the volatility ETF (VXX) here. If the markets keep going up forever you might lose 10%. If they don?t, you will make a quick 30%, and 100% if volatilities return to the highs seen in October. The cost of carry is modest, there is no time decay as with options, and there is no contango. In fact, near month volatility is trading at half the levels of long term volatility. That is the kind of risk/reward ratio that I am constantly looking for.
I am frequently asked to propose a long term portfolio that investors can just buy and forget about. They have no interest in sitting on the edge of their seat waiting for my next trade alert, staying up all night to catch the European opening, or scanning every wire service headline to glean a momentary trading edge.
I have put together a model portfolio that achieves exactly that. It focuses on the major trends sweeping the global economy that should run for a few decades or more. Regular readers of this letter are already well aware of these themes, and probably mumble them in their sleep.
Rising standards of living in emerging markets are certain to lead to major shortages in every type of commodity. These include food, precious metals, base metals, and all forms of energy. There is no way to avoid this shortfall, as the population is growing faster than our ability to bring on new sources of supply, which often take five years or more.
I have a big slug of exposure to specific emerging markets where GDP growth rates are triple or more than America?s own pathetic 2% rate. There is also a heavy weighting in America?s premier technology companies. Since the industry is literally on my front door step, it is clear to me that technological innovation is accelerating and will have a leveraged effect on our future, and that the US has an overwhelming lead. If you don?t believe me, then just try to hire an engineer in Silicon Valley, or find a reasonable rental in Palo Alto or Mountain View.
This would be the ideal portfolio for those who intend to lock it up for a long time. It would be a great use of funds that will not be needed for college educations that are 18 years into the future, or a retirement that is 40 years out on the horizon. It has an aggressive growth element to it, so it is ideal for the younger investing class.
I am not by any means suggesting that you run out and buy this portfolio today. Wait for a substantial sell off in the markets before sticking in your toe. One of the reasons that I keep high cash positions is so that I can buy names like these on the big dips. October 4, 2011 would have been a great day to load the boat, but only if you went into that day with cash coming out of your ears.
The portfolio is only available to paid up members of Global Trading Dispatch or my daily premium newsletter. To download the excel spreadsheet with the names, ticker symbols and asset class weighting, please click here, and enter your user ID and password.
Global Trading Dispatch, my highly innovative and successful trade mentoring program, earned a net return for readers of 40.17% in 2011. The service includes my Trade Alert Service, daily newsletter, real time trading portfolio, an enormous trading idea data base, and live, biweekly strategy webinars. To subscribe, please go to my website at www.madhedgefundtrader.com , find the Global Trading Dispatch box on the right, and click on the lime green ?SUBSCRIBE NOW? button.
No, I?m Not Telling You What?s in the Portfolio
https://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-02-26 22:02:392012-02-26 22:02:39The Mad Hedge Fund Trader?s Long Term Model Portfolio
It?s all about Apple (AAPL). A disproportionate share of the market volume has been pouring into Apple shares for the past two weeks. The higher it went, the more people wanted to buy. Just in the past week, the company has tacked on a staggering $75 billion in market capitalization. The action in the call options has been absolutely explosive.
The focus of the US stock market distilled down to not just a single sector, but a single stock. This kind of concentrated price action is a classic indicator of a market top. When Apple rolls over, the rest of the market will follow it down. Apple has pulled this off while virtually every other asset class is showing their own topping formations, including most other stocks, the euro, the yen, copper, gold, silver, and even the ags.
When I started my February 15 webinar at 12:00 noon EST, Apple was going gangbusters, up $15 to $525. By the time I finished, it had plunged $15, suggesting the short term top is in for the sizzling, innovative company. A rumor swept the market that Apple?s weighting in the NASDAQ would be diluted once again, which would be highly negative for the share price.
So am I going to sell short Apple stock? Heavens no! I love Steve Jobs? creation. I still think it will hit my long term target of $1,000 sooner than later. In fact, I just bought a new solid state MacBook Pro with all the specs maxed out and I am picking up my IPhone 4s on Friday.
Instead, I am going to use Apple as the signal for my cross market timing, and then short a stock I hate, Bank of America (BAC). This is one of the top performing stocks of 2012, soaring some 50%, in six weeks. Despite that move, it is still trading at a huge discount to book, meaning that traders think the company is lying through its teeth about the true extent of its loan losses.? Its shares are beating Apple by an almost 2:1 ratio this year, which has jumped only 28%. How perverse is that? The two companies are almost mirror images of each other. Think future versus past, booming versus broke, good versus evil, $525 versus $8.
The best run hedge funds use this type of cross market signaling all the time. I saw it constantly on the trading floor of Morgan Stanley. It is a great way to capture laggards and move into the highest beta names when a market reversal is imminent.
When I am in a selling mood, I want to sell the most expensive stock in the market that has had the most blistering recent gains. That describes (BAC) to a tee, which is nowhere near solving its structural problems and still has a declining real estate market to deal with.
I chose to buy puts on (BAC) instead of the (SPY) because you always get much greater volatility in individual names than an index has a whole. Look at (BAC)?s performance this year. A 7% rise in the (SPY) brought a 50% gain in (BAC). That kind of volatility works on the downside too. A single stock will outperform a basket every time. That?s how you maximize your bang per buck on the put options.
Check Out Bank Of America?s New Logo
https://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-02-15 23:04:422012-02-15 23:04:42Use Apple Timing to Short Bank of America Stock
The volatility index (VIX) is just not buying this sell off. Even with the Dow down over 300 today, the (VIX) has only managed a meager 3% gain on the day. With a move in equities of this magnitude, you would expect volatility to rise by 15% or more. If traders and investors really believed that the risk markets were really going to crash to new lows, they would be paying through the nose to buy downside protection, which would be clearly visible in a (VIX) spike. These figures prove they aren?t.
Let?s do a quickie cross asset class review here and look at what else on the table. The S&P 500 is precisely at the 50% retracement of the entire 200 point move up from October 4. It could hold this level and keep the bull move intact. While junk bonds (HYG) are down, they are nowhere near the levels suggesting that a financial collapse is imminent. Advance decline ratios are at all-time highs, not exactly an argument for a new bear market. Nor are Treasury bonds drinking the Kool-Aide. Sure they are up today, but not as much as they should be.
It all has the makings of an asymmetric trade for me. That means that the next piece of good news will deliver a larger move up than the next piece of bad news will bring a down one. So a tactical long here will bring an outsized returns. It could well be that the failure of the Super committee is fully in the price, and the mere passage of the deadline might bring a big rally. There are certainly a lot of hedge funds looking to chase yearend performance and value players happy to bottom fish to pull this off.
The bulls also have the calendar strongly in their favor. Not only is the November-December period the second strongest bimonthly period of the year, investors are massively underweight equities. As I never tire in explaining to my permabear friends, most investors can?t sell stock they don?t own. That?s why the Armageddon scenario never kicked in during September. That leaves hedge funds and high frequency trading alone to break the downside supports, something they have so far been unable to do alone.
Which girls will get invited to the next dance? The same ones taken to the last one: commodities, energy, rail, coal, and technology stocks, especially Apple, which is sitting bang on its 200 day moving average today.
Of course I could be wrong about all of this. Conditions in the markets are so uncertain here that there are no real high quality trades to be found. Almost everyone is posting negative returns this year, including some of the smartest people I know. That?s why I have pared back my own trading in order to preserve my own 42% year to date gain. But then, I am 75% in cash, so I can afford to take a relaxed view of things.
Only trade here if your wife is pestering you for a larger Christmas shopping budget. Don?t even think about opening up a new short here, because you have already missed the big, easy move. Then again, you could consider getting a new wife. It might be cheaper.
https://www.madhedgefundtrader.com/wp-content/uploads/2011/11/bear.jpg488650DougDhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2011-11-21 23:03:332011-11-21 23:03:33Watch Out for the Bear Trap