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John DiCecco
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Trendcharts.ca is a financial publication which focuses primarily on the technical analysis of equity markets. We use a proprietary trading model designed to identify major market trends and put us on the right side of these trends. For our Model Portfolio we track 5 major market index ETFs,... More
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  • Why Apple's Q4 Earnings Miss is a Good Thing for the Stock
    In 2011 Apple's stock had become a victim of the company's success.

    Market expectations became so unreasonably high that Apple had to come in with blow-out earnings every quarter just to keep the stock from dropping in price!

    Apple delivered blow-out earnings results in January, April and July of this year, but the effect on the stock was actually negative.

    Let's take a look at what happened after each earnings release:
    1. On January 18, 2011 Apple reported an EPS of $6.43 which came in 19.52% higher than street consensus, and 75.25% higher than the previous year. On January 18 the stock closed at $340.65 - the next day it closed at $338.84 - 23 trading days later (Feb.22) it was trading at $338.61.
    2. On April 20, 2011 Apple reported an EPS of $6.40 which came in 19.63% higher than street consensus, and 92.19% higher than the previous year. On April 20 the stock closed at $342.41 - the next day it closed at $350.70 - 22 trading days later (May 24) it was trading at $338.19.
    3. On July 19, 2011 Apple reported an EPS of $7.79 which came in 34.08% higher than street consensus, and 121.94% higher than the previous year. On July 19 the closed at $376.85 - the next day it closed at $386.90 - 22 trading days later (Aug.19) it was trading at $356.03.
    Of course there were other factors which effected the stock price - the perpetual Euro debt crisis - the US credit downgrade - the worries about Steve Jobs' health - but the fact remains that market expectations for Apple had become unsustainably high.

    This is why Apple's miss on Q4 2011 earnings is so significant.
     
    Note: Apple actually beat their own estimates for the quarter by a wide margin - they had forecast an EPS of $5.50 and came in at $7.05 - but nobody really pays any attention to this.

    Yesterday's earnings miss has burst the delusion bubble of street expectations for Apple. Going forward the company will no longer need to come in with blowout earnings in order to satisfy the street. And this is good for the stock. Lower expectations means that Apple can now modestly exceed market consensus numbers and the stock will actually surprise to the upside after earnings instead of going south. If they come in with blow-out earnings (which is no longer the expectation) the stock wil explode to the upside.

    Today's sell-off in Apple is healthy for the stock going forward (down 3.79% to $405.49 at the time of writing). It has broken the pattern that has suppressed the value of the stock after each earnings report in 2011.

    We expect the stock to consolidate around the $400 level and then begin a slow, gradual climb to $450 by Christmas. The math is simple. The company reported earnings of $7.05 for Q4 and the stock is at $405. Apple, which usually provides conservative guidance, forecast revenue of $37 billion and EPS of $9.30 for Q1.

    So if the stock is at $405 today with earnings for Q1 expected to rise 31% quarter over quarter, and 44% year over year, why would you want to sell the stock today?

    Add to this earnings growth rate the fact that Apple has $81 billion in cash and is trading at a rather conservative forward P/E of 12.74 and it doesn't make any sense to sell the stock at this level.

    But stocks do not trade on fundamentals alone. Macro-economic events can push Apple lower along with the general markets. And if we do see the general markets fall due non-Apple issues I think that the following price points would be excellent entry levels into the stock if you don't own it, and good price points to add to any existing positions.

    The first level of technical support for Apple is at $390. If $390 doesn't hold then the next support level is at $375. Given the company's fundamentals if it does drop to $375 it won't stay there for long. These are the price points at which we will be adding to our current Apple position (see chart below).

    Market psychology is just as important as fundamentals when it comes to the price of a stock - and today the market psychology for Apple improved for the better.




    Disclosure: I am long AAPL.
    Oct 19 10:28 AM | Link | Comment!
  • Timing the Markets with the Magnificent McClennan Oscillator

    The last three years have been some of the most volatile, violent, and eviscerating years ever experienced in the stock market.

    Traders have been hit with a lethal lexicon of capital destroying phrases: black swans, peak oil, sub-prime mortgages, corporate bankruptcy, flash crashes, earthquakes and tsunamis, nuclear meltdowns, sovereign insolvency, debt contagion, recession, compression, depression. 

    It has been a never-ending barrage that I'm sure has left many traders and investors shell-shocked. Just when it feels that it might be safe to poke your head out of the trading trenches, another apocalyptic shell comes screaming overhead threatening to blow the whole global financial system into smitherines.

    And yet in the midst of this chaos and volatility there have been tremendous trading opportunities - both to the upside and to the downside.

    Being an optimist I prefer to make money when things go up - I don't have the streak of cynicism required to be a successful short trader. So I spend my days looking for tools that can help me identify opportune entry points into the markets after they have been decimated by the latest crisis du jour.

    One tool that has been extremely effective - in fact, it has a perfect batting average since August 2010 - is the McClennan Oscillator.

    The McClellan Oscillator is a market breadth indicator used to evaluate the rate of money entering or leaving the market and interpretively indicate overbought or oversold conditions of the market.

    To have a look under the hood of this oscillator, click on the following: en.wikipedia.org/wiki/McClellan_Oscillator#How_it_works

    The McClennan has successfully identified the bottom of every market sell-off since August 2010.

    Below is the chart for the McClennan since August 2010, and below that is the chart for the SP500 over the same period.

    You can see that whenever the McClennan dipped below -60 it signalled the end of a market sell-off.

    Once the McClennan dips below -60, however, it is difficult to know how low it will drop. It is thus prudent to wait for it to bottom out and close back above -60 before establishing a LONG position in the SP500.






    Let's take a look at the results:
     

    1. August 2010 - the Buy Signal was generated on August 25, 2011 when the McClennan climbed from below -60 and closed at -48. Since the McClennan is calculated after the close of each trading day, it can only be acted upon on the following trading day. On August 26, 2010 a LONG position could have been taken with the SP500 closing at 1,047. The SP500 peaked on November 5, 2010 at 1,225 - this was a bullish run of 17%.
    2. November 2010 - the Buy Signal was generated on November 18, 2010 when the McClennan climbed from below -60 and closed at -30. On November 19, 2010 a LONG position could have been taken with the SP500 closing at 1,199. The SP500 peaked on February 18, 2011 at 1,343 - this was a bullish run of 12%.
    3. March 2011 - the Buy Signal was generated on March 17, 2011 when the McClennan climbed from below -60 and closed at -54. On March 18, 2011 a LONG position could have been taken with the SP500 closing at 1,279. The SP500 peaked on April 29, 2011 at 1,363 - a bullish run of 6.5%.
    4. June 2011 - the Buy Signal was generated on June 9, 2011 when the McClennan climbed from below -60 and closed at -42. On June 10, 2011 a LONG position could have been taken with the SP500 closing at 1,270. The SP500 peaked on July 7, 2011 at 1,353 - a bullish run of 6.5%.
    5. August 2011 - the Buy Signal was generated on August 11, 2011 when the McClennan climbed from below -60 and closed at -28. On August 12, 2011 a LONG position could have been taken with the SP500 closing at 1,178. The SP500 peaked on August 31, 2011 at 1,218 - a bullish run of 3.3%.
    6. September 2011 - the Buy Signal was generated on September 23, 2011 when the McClennan climbed from below -60 and closed at -42. On September 26, 2011 a LONG position could have been taken with the SP500 closing at 1,162. The SP500 peaked on October 14, 2011 at 1,200 - a bullish run of 3.2%.
    The McClennan can also be useful in identifying when markets are overbought (a close above 60) but it is more effective as an indentifier of market bottoms. Markets often peak before the McClennan rises above 60 and a close above 60 can sometimes indicate a period of consolidation rather than the beginning of a significant sell-off.

    The McClennan can help you get into a LONG trade, but unfortunately it is not of much help when it comes time to decide when to close the trade for a profit. I have not been able to identify a pattern in the McClennan that can help determine when a rally has peaked. 

    Like most technical indicators the McClennan is not perfect but it can help muster the courage to go LONG when everyone else is running for the hills.

    Determining how to maximimze the gains on each McClennan Bullish Signal is still a work in progress - an update will be provided once (if) a reliable 'rally peak signal' has been identified.




    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Oct 17 7:40 PM | Link | 1 Comment
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