Which Way Wednesday: Through The Roof Or Smashed Into A Thousand Pieces?

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 |  Includes: AAPL, BMI, CMA, DIA, FHN, FRX, FSII, GCI, GS, HAS, JAKK, LLTC, MRTN, MTB, PJC, QQQ, SCHW, SONC, SPY, TRV, VCBI, WFC
by: Philip Davis

GRANDPA JOE: But this roof is made of glass. It’ll shatter into a thousand pieces. We’ll be cut to ribbons!

WILLY WONKA: Probably.

Is today going to be the day? After pressing against our breakout levels for a week, today do we should finally have the gas to get over the top or will our Must Hold levels keep acting like a solid barrier? Oddly enough, I was asking the same question on August 30th, when I asked if we were "Breaking Higher or Dressing Windows?" My comment from that morning works for today as well:

No way to slow down. That line from Tull’s "Locamotive Breath" keeps playing in my head as I look at these rumor-driven markets and contemplate that we MUST keep going higher – or we will fall. On the whole, that’s not generally a winning long-term investing premise BUT – it does so happen to be the entire principal on which space travel is based so let’s not discount it entirely.

Willy Wonka understood stock market physics. There had to be enough power to get through that overhead resistance or it was going to be a very painful test of the top (like the one we had in August). Since our July dip, we’ve come back for another try at our Must Hold lines four times but the volume has been substantially lower than it was in July, leading us to believe it is only TradeBots, and not Oompa Loompas, who are buying this market.

Can TradeBots alone give us enough "thrust" to break through this time? Probably not. We need to get real buyers off the sidelines and that's not very likely to happen until we have real resolutions to the EU crisis along with some genuinely positive earnings news to countermand the doom and gloom prognostications we've been getting from "expert" forecasters.

So far, this week, we've had 58 beats and 19 misses out of 88 reporting companies with seven issuing positive guidance and five issuing negative guidance (the rest were in-line or no guidance) so nothing to complain about there. Who missed? Schwab (NYSE:SCHW), First Horizon (NYSE:FHN), Gannett (NYSE:GCI), Hasbro (NASDAQ:HAS), Wells Fargo (NYSE:WFC), Badger Meter (NYSE:BMI), Forest Laboratories (NYSE:FRX), Goldman Sachs (NYSE:GS), JAKKS (NASDAQ:JAKK), Apple (NASDAQ:AAPL), FSI International (NASDAQ:FSII), Linear Technology (NASDAQ:LLTC), Marten (NASDAQ:MRTN), Sonic (NASDAQ:SONC), Comerica (NYSE:CMA), M&T Bank (NYSE:MTB), Piper Jaffray (NYSE:PJC), Travelers (NYSE:TRV) and Virginia Commerce (NASDAQ:VCBI) so far. Overall, it's a pretty mixed bag that doesn't really (signal any particular overall weakness - more likely just that there were winners and losers in Q3 and the fact that Apple (AAPL) is ranked with the "losers" is a strong indication that we can't judge a book by its cover.

AAPL WEEKLYAs I said to members last night - AAPL earnings were fantastic. People simply didn't buy IPhones last Q because they were waiting for the IPhone 5. In fact, demand for new phones was so pent-up last week that AAPL sold 4M $500 4S models in the first weekend. Aside from that being double the sales pace of the original IPhone - it's also $2Bn in two days! That should get Q4 off to a good start, don't you think? As you can see from David Fry's chart, AAPL has been in a very strong channel and our trade idea on that in yesterday's member chat was:

  • Buy AAPL Apr $410 calls for $49
  • Buy AAPL Apr $420 puts for $43
  • Sell AAPL Nov $420 puts for $19.50
  • Sell AAPL Nov $420 calls for $20

Obviously, with the Nov timeframe on the short position, we'll have to wait and see how this plays out but, of course, $420 is our target when things calm down. Our more aggressive trade idea from Tuesday was selling the Nov $380 puts for $6.30 to fund the purchase of 2 Oct $405/410 bull call spreads for $3.15 each for a free look (hopefully) at $10 worth of spreads. I'm not sure we'll get our $410 back by Friday and, if AAPL can't hold $400, we need to cash the bull spreads and ride out the short puts.

Other than that, we've stayed away from AAPL betting lately. As I said at the Vegas Conference, I think AAPL is the best company in the world but I also felt $420 was a good top for now and didn't expect them to justify a higher valuation this earnings. I still think they are WORTH $500 a share - just not now. Another target trade idea we had from the 10th was buying the AAPL 2014 $550 calls for $41.50 and selling the 2013 $500 calls for $30.10. It will be interesting to see how that one holds up today but it's a long-term trade that expected exactly what's happening now.

Click to enlargeOther than using AAPL as a bullish offset, the only other working trade idea that I see from Member Chat in October was from my morning Alert to Members on the 4th and that was a great entry where we sold the $335 puts for $5.30 and we already picked up $15 on the weekly $380/395 bull call spread so that net .30 credit will finish up 5,100% if AAPL manages to hold $335 today and THAT is how I love to play earnings (selling far out of the money puts or calls for ridiculous premiums to cover sensible bets). $10 put in play there paid for an entire annual premium membership to Philstockworld - that's not bad, is it?

In non-Apple news: Moody's cut Spain's Rating to A1 from Aa2 but that's being overshadowed by a POSSIBLE EFSF deal which is now rumored to be 2 TRILLION EUROS - Muhahahahaha! At the same time, the EU reached a deal as part of a short-selling law that will pave the way for an optional ban on naked credit-default swaps on sovereign debt. Under the deal, traders may be prevented from buying CDS on government bonds unless they either own the sovereign debt or other assets whose price moves in tandem with it.

Our own Senate pretends to care today with a hearing on whether ETFs affect market volatility (spoiler alert - they do!). Look for good quotables from the guy's who wrote last years HI-larious Kauffman Foundation Report. We had some surprisingly good housing numbers this morning with September Housing Starts up 15% to 658,000 - which is strange but we'll take it. Consumers better get out and buy those homes while they can because Real Earings DECLINED another 0.1%, down 1.9% for the year with average weekly earnings down 1.7% for the year so we're just 50 years away from slavery at this pace.

No surprise then, that the September CPI was "just" 0.3% with the core CPI down to 0.1% as (and I know this will be a shock to conservatives) IF YOU DON'T PAY PEOPLE THEY CAN'T BUY THINGS. PPI was up 0.8% and CPI is up just 0.1% so that's 0.7% of margin squeeze if I remember my calculus correctly. That's not particularly good for corporations but none of that will matter if the EU is going to pass a stimulus program that's 20% of their GDP so we'll continue to ride the rumor wave as we skate along our critical resistance (Beige Book at 2 p.m. should be interesting today) and I'll let Jon Stewart have the final word as he sums up America's top problem brilliantly (the same one I noted back in my August editorial):

Disclosure: I am long XLF, AAPL, TNA.

Additional disclosure: Positions as indicated but subject to change.