We've moved from an Apple hedge fund playground to a market battleground. Heading into the 3-day weekend, there is a serious tug of war between Europe and Apple. Making a European forecast at this stage of the game is enough to make one dizzy. Greece has no official governing body until the June 17th elections and yet European leaders feel urgency to solve the uncertainty at today's EU Summit.
The Dow has sold off 1000 points from 13,300 on May 3rd because of Greece; but when does the Greek threat become over-exaggerated? Are investors going to fret over Greek exit strategies this weekend or will they focus on newfound plans of stimulus from this EU Summit? Should we sell some Apple (NASDAQ:AAPL) allocations in order to avoid the potential panic of this weekend? Is the U.S. economy going to stall and end the bull market? These are the important questions floating around trading desks, the answers to these questions will guide our short-term strategy.
Answer #1: Yes, the market is overreacting to Greece just like it has the last 38 times. Greece will not leave the euro and Greece will gain a growth component to its bailout agreement. That is bullish for the market. Unfortunately we have to deal with shouting reporters who have a love affair with Greek turmoil trying to make this a bigger story than it is. The winning strategy over the last two years is to sell the market at highs and buy back in on European lows. This is a European low.
Answer #2: After the EU Summit, the focus will likely turn towards stimulus. Prior to this Summit we have noticed factions of opinions among EU leaders. Plans B, C & D (Grexit contingency plans) are getting more publicity than Plan A (Growth). We expect Plan A will regain credibility and cause a market rally over the long run. Will Plan A be able to soothe investor panic this weekend? It doesn't really matter. It's coming and it's coming soon.
Answer #3: The great thing about buying Apple at or near a low is that you don't have to panic and sell at every hint of a negative variable. As long as your options provide you with sufficient time, the stock will regain its prior high by July and it will establish new highs this fall. The technical takeaway is that Apple has bottomed and is now fighting to begin stage two of the rally. The technical action suggests that as soon as Apple breaks through the $570's it will shoot up to $618 (approx June 11th). After it breaks through $618 it will shoot up to $644 (approx July 15th). After it breaks through $644 it will shoot to $750 (approx October 15th). Buying Apple under $570 is a great entry point. Sure we might need to wait a week or two for the stock to break out of the $570 range, but this is a time when patience will pay off.
Answer #4: The stock market has been waiting for the economy to give it a reason to return to its pre-financial crisis highs of Dow 14,000. Without a valid reason, the market has been trading range bound and forced to use Europe as its reason for corrections. What would happen to the market if Greece gets a stimulus package and the U.S. economy exhibits strength in housing? A housing recovery is the economic variable we have been waiting for, but according to recent data, the wait is over. Housing starts are up 30% from a year ago. New home sales beat consensus expectations and are up 9.9% from a year ago. Existing home sales rose 3.4% in April and are up 10% year over year. The median price of an existing home is up 10.1% from a year ago. Home prices overall are up 2.7% from a year ago representing the biggest jump since 2006. Commercial and industrial loans are up 13.6% in the past year. In addition to construction-related data, private payrolls are up 26 consecutive months. Consumer financial obligations are the smallest share of income since 1984.
We're not selling here, in fact we're buying more. Don't let the panic of the media scare you out of this Apple opportunity. We're adding another 5% allocation of the AAPL October 2012 $600 calls.
Disclosure: I am long AAPL.