Stalking the Bear: Part 3 of a series
In this "Stalking the Bear" series, Part 1 (Trouble Brewing Behind Facade Of Bull Rally) discussed some disturbing signs developing around the shares of market leader Apple (AAPL), while Part 2 (Stalking the Bear: Trouble in Transports) highlighted the lag and non-confirmation of the Transportation index. Both of these issues were, in my estimation, reasons to bring a cautious voice to the cacophonous euphoria of a late stage bull market.
Rosenthal Investing Axiom: When vitriol against sound investment analysis reaches a fever pitch, a top (or bottom) is close at hand
Based on the responses to the earlier "Stalking the Bear" articles, one would think I had questioned the very existence of the Judeo-Christian belief of a higher deity. Or perhaps I had suggested Mohamed was in the act of tripping, instead of leaping from the rock. Whatever analogy suits the takeaway is the same: Don't hate the player, hate the game.
So, what happens from here? A brief review of the AAPL chart should offer a good starting point for reflection.
As you can see above, highlighted in yellow is the original negative reversal cause for concern I wrote about in "Stalking the Bear" part 1. And, now highlighted in red is the total disregard for the strong EPS numbers released in April and subsequent price break below the 50-day moving average (thin black line). May 18's price action low hit the high of the reversal day highlighted in yellow. I suspect support may come into the stock for a time around these prices, but a sell-off to the 200-day moving average (around $458 and moving) is no doubt probable before this top is complete.
Author's Note: I have not been long or short AAPL during this entire period, nor am I advocating an AAPL short position. I am merely using AAPL's dominance as a market leader to help gauge market direction. I do not have a vendetta out for AAPL. In fact, I have no emotion towards AAPL one way or the other. Word to the wise: emotion clouds judgment, be advised.
As long as we are on the topic of emotions, I suggest we all bow our heads and offer a moment of silence for those who have fallen to this nemesis of sound investing principles. Who can forget those who charged into the Yahoo breach in the year 2000 when the shares were trading at $500-per and analysts were calling for a sure $600+. How did that call turn out? Recently, we saw AAPL trading above $600 and the same analyst crowd was crowing for $1,000. The similarities raise the hair on the back of the neck.
Don't like the Yahoo example? How about the owners of Dell in 1999. Anyone else remember the monthly Dell 'millionaire' shareholder barbeques CNBC was only too happy to cover? These shareholders would look into the camera with an adorable almost infant like honesty and explain their entire portfolio was invested in Dell because it "only goes up". Haven't see a barbeque in a while. Where do they meet up now? At a local 711 for a big gulp and some Yodels. Maybe a little beef jerky if they are missing that smoky taste of barbequed steak.
My point is, if you let emotion get in the way of good sense while investing, you are setting yourself up for certain failure. I wish to save you that pain, beware.
AAPL and The Market
The correlation between AAPL's price movements and the overall market continues to be potent. So, while I believe a relief rally may be right around the corner after the most recent 13-day decline, the opportunity to short the said rally will be compelling.
If I was writing this missive pre-2008, I would be aggressively suggesting short positions on any and all rallies. Unfortunately, this is a post-2008 world of massive central bank (C.B.) intervention. One need look no further than the November 30, 2011, C.B. collusion to recall the dangers of short selling markets in this new world order.
The keys to successful shorting today are patience and nimbleness. We must not short after a 13-day sell-off. We must wait for a rally that takes us back to the 20- or 50-day moving averages and reassess. Rest assured, I will take to the pages of Seeking Alpha once again when I believe the time for a market short is upon us.
Epic Gold Buy Point
In the meantime, should you wish to engage the markets opportunistically, might I suggest a review of the precious metals. It would appear every last momentum bull rider has been thrown and trampled by the nine-month-long consolidation of gold and silver prices. Trouble in Europe, the blow-up of MF Global, the recent inversion of Morgan Stanley's credit curve and JPMorgan's woes have all contributed to a strong US dollar weak commodity trade. I believe that correlation may be coming to a close.
On May 17 and18, we have witnessed a sharp gold rally off the lows, even as the US dollar has remained strong and we have our first weekly close up on volume since Jan. 27th. Please review the chart below of the gold ETF (GLD) for a look at what very well may be the development of a double bottom and an epic buy point for the yellow metal (Please note I use GLD only for analysis not investment).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.