WASHINGTON, November 20, 2012 – Well, shoot! The Maven has a bit of egg on the face this morning. As G. W. Bush might have said, the Maven misunderestimated the scope of yesterday’s monster Wall Street rally, led by Apple, that came at us like some wind come sweepin’ down the plain. Apple’s share price suddenly awoke from its recent, roughly 25% waterfall decline to reclaim over 7% of it back in just one trading day. The result, like a sudden, massive explosion, rocketed the Dow upward some 207 points by the day’s bang-up close, nearly obliterating the profits we’d been ready to book in our leveraged inverse (short) ETFs.
The market itself had clearly been ready to rally, due to extreme oversold conditions. For the layman not familiar with Wall Street jargon, “oversold” means, more or less, that days, and sometimes weeks or months of indiscriminate selling and short-selling has come close to running its course according to technical charts that map this kind of activity.
When nearly every conceivable seller or short seller is doing selling, there are few if any sellers left. Detecting this, generally via charts, buyers sense a bottom—i.e., a line below which the market now is unlikely to go—and step in to pick up battered but perfectly good to great stocks that are now on fire sale.
As buying picks up, it begins to scare the short-sellers—those negative investors who’ve borrowed the stock of company X, then sold it as their first transaction hoping to close the position by buying the stock back at an even lower price, thus pocketing the difference on the way down. Since short sellers lose money when the stock they shorted starts going up, they get antsy at some point in the up move and buy the stock back to close their position at a loss. *
If company X really begins to take off on the upside, short-sellers panic and start buying wholesale, starting what, to cattlemen, looks an awful lot like a stampede out of the stockyards, otherwise known as a “short-squeeze,” a delightful term that probably also puns on what you think it does.
This is clearly what happened to Apple yesterday. The stock—expensive in terms of dollars—was and still is ridiculously cheap on a price/earnings and cash-on-hand basis. Having plummeted from over $700 per share to nearly $500 per share in maybe about a dozen trading days, its precipitous drop was patently ridiculous. But the stock had been “over-owned”—i.e., in everybody’s portfolio, giving them bragging rights—and, at the top, when the selling got started it was hard to stop as first the funds and the hedgies, and then remaining regular investors, started defenestrating the stock on a massive scale.
Adding to the pain were the high-frequency traders (HFTs), most of whose algorithms drive the machines to trade positions based on headlines, not profits, losses, charts, or ratios. Making things even worse was options expiry last week and its assorted shenanigans. Plus, believe it or not, the pending “fiscal cliff.”
Until a few weeks ago, longer-term holders of Apple (AAPL) were so flush with capital gains it wasn’t even funny. Realizing that these gains might be subject to catastrophically higher tax rates in 2013, when AAPL started going down, nearly everyone who owned it, it seems, headed in a panic for the exits, crushing the stock while taking their profits at this year’s more favorable tax rates.
With charts indicating that pretty much everybody who’d wanted to dump AAPL had indeed done so, it was off to the races. An up move was indicated in last Friday’s mildly bullish tone. But Monday, to roll out another cliché, it was “Katie bar the door!” Apple close up well over 30 points. And, given its substantial weighting in both the S&P 500 and 100 averages—the latter being more tech-heavy and often traded now via the ETF lovingly known as “the Qs” (symbol: QQQ)—first the S&P and then the Dow Jones Industrials (DJI) itself began to sprint upwards, the results of which have already been described.
“Oversold” conditions, at least short-term, were, as a result, “cleared” yesterday, which makes it likely that the market will start resuming it recent, characteristic weakness today. As we write this just after the market open (9:45 a.m. EST), the Dow is down nearly 60 points with the S&P 500 down about 6 and the even tech-ier NASDAQ off 10. Apple itself is off about 3 as of now, indicating that those who swooped in for a day-trade yesterday are probably also booking profits.
All the Apple nonsense is pretty much that—nonsense. We don’t blame anybody for taking profits in the stock. Heaven knows that’s the prudent thing to do with those potentially big capital gains tax hikes still a very real threat. But the stock wasn’t helped recently by the usual idiots in the financial press taking the company’s recent product announcements to mean that the stock was finished forever and would once again take a back seat to Microsoft like it did though much of the 1980s and all of the 1990s.
This strikes us as a bunch of poppycock. Much of it has been coming from writers who all were onetime PC-users and Apple-bashers, some of whom (does the name John Dvorak ring a bell?) actually made a good journalistic living writing this kind of vindictive crap-masquerading-as-reportage. In any event, even if it never invents another new product, Apple could probably coast for upwards of five years and still make more money than most companies on the globe. Given the company’s DNA, however, that’s not likely to happen.
We’re not quite sure that there will be anything else like the iPhone on the horizon, a product that, like the microwave oven, nobody even knew they needed until they did. But Apple will continue to leverage what it does best: creating consumer products that are easy to use and beautiful to look at.
Apple stuff is no longer “the computer for the rest of us” like the Macintosh was once touted as being. But Apple products are still the ones that people who can afford them really want. Like the organic produce at Whole Foods, those people will continue to buy these high priced products, not only on the basis of perceived quality, but also so they can make fashion statements to their friends. And that’s what will probably drive Apple higher again, at least in the near term.
As for the rest of the market, AAPL ignited a huge rally and short-squeeze yesterday. But today, and for the rest of the week, everybody is going to start to think “holiday.” Trading will likely thin, and averages will likely be tepid to down. Congress, of course, is on holiday again. (Don’t you wish you could “earn” what these guys do and take the time off that they do?) That means nothing more on the fiscal cliff until at least next week.
And then there’s that Israel-Hamas-Egypt-Syria-Iran thing which, at a moment’s notice, can send markets into a violent tizzy. So probably the best thing we can do at the moment is hang on to our ETF shorts and see if we can’t make some money on the nervousness; and perhaps sneak into a few shares of fossil-fuel related stocks—notably Marathon Petroleum (MPC)—that have performed like real champs even in this environment by at least holding their own. A little physical gold via either the IAU or GLD ETFs is nice just to have. And maybe the mattress for the rest, at least until our holiday weekend has past.
Caution is the watchword. Any time your investing fate is entrusted to the responsible hands of Washington, the Eurocrats, and Hamas/Iran, the price of solvency is eternal vigilance.
*(NOTE: Back in the day, when the Maven taught adult-ed investment courses at Northern Virginia Community College, it was options and, even more, short-selling that proved really hard to explain to new or inexperienced investors. For many, selling a stock that you didn’t own first and then buying it back later at a lower price for a profit seemed somehow to violate the laws of nature. And the Maven is not being condescending here. Such transactions don’t seem “normal” to most people who are accustomed to making a profit when they buy something cheap and then sell it for a higher price.
The Maven himself was uncomfortable with this for years and still rarely takes the short side since the theoretical loss in such a transaction is infinity. Plus, when you’re short a stock, it’s done in a margin account (since you have to borrow the shares to sell them) and margin interest rates can start whittling away at your potential profits if the position doesn’t move for you fairly quickly.
Nonetheless, short positions can help you break even or even prosper in a very bad market. As the spirit of the late Joe Kennedy, Sr. He shorted hugely in the early days of Great Depression I. That, and a few other marginal (!) enterprises helped to create that great Kennedy fortune in a time when few others could pay the rent.)
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate. He is currently long IAU, SMN, QID, and FAZ, and a small position in MCP; and continues to hold medium term corporate and municipal bonds.
Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.
Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.
References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.
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