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Selling Apple Prior to Midterm Elections

|Includes:Apple Inc. (AAPL), BIDU, NFLX
The most important variable for the market has temporarily

changed from stock price valuation to politics.  All eyes are on Tuesday’s midterm

elections with investors optimistic that the Tea Party movement can

force gridlock in Washington.  The Tea Party movement is an

interesting phenomenon.  If the Tea Party had been in control during

the financial crisis then General Motors would be dissolved, the

banking system would have been left on its own to collapse, and U.S.

currency would probably have already returned to the gold standard.

There is no question that this political movement is extreme if left

to itself, however, a dose of Tea Party mixed into a Republican

majority with President Obama at the head could produce a wonderful

tonic for the stock market.  If Obama shifts his policy towards the

right as Bill Clinton did in 1994 and is successful at stimulating the

economy through a conservative agenda, the stock market should

outperform the historical 21% average return for a 3rd year 1st term

Democrat.  The current market is trading on this optimistic scenario.

 

But what if all doesn’t go according to plan over the next few days?

What if undecided voters rebel against the extremism of the Tea Party

and Democrats overcome the odds to win both the House and the Senate?

Although this scenario is unlikely, some within the Republican Party

are a little nervous by what is happening in California with gubernatorial candidate Meg Whitman getting buried in the polls by Jerry Brown and Carly Fiorina not able to budge Barbara Boxer.  This negative momentum could

possibly spread to the rest of the country as a vote signaling ‘we’re

not happy with Washington but we don’t like the new alternative

either’.  I’ll admit I would be much more comfortable with the

projected outcomes of Republican victory if this Tea Party movement

was a little more moderate.  I am not yet convinced this is a sure

thing.  As an investor looking to protect some large gains, I find it

prudent to watch the election play out before committing new capital.

With the market at the upper end of its trading range and with Apple

action looking worn out I think we could be in for a ‘sell on the

news’ reaction even if the Republicans do win the majority.  And if

Democrats maintain a majority it won’t be a ‘sell on the news’

reaction, it will be a ‘sell the surprise’ overreaction!

 

Let me clarify, I fully anticipate the Republicans will win a

majority.  In fact, I think this Tea Party movement has as much

political enthusiasm as the campaign of change that got Obama elected

to the White House.  I think the Tea Party movement will open the door

for a Republican candidate like Mitt Romney, Jeb Bush, or even the new

superstar from Florida Marco Rubio to give Obama a run for his money

in 2012 but as an investor I like to live in a world of certainties.

I need to see that the Tea Party movement is legit before I risk my

hard earned investment capital.  As soon as victory is assured, I will

look to reinvest my cash in the first half of November.  As for today

I am content to sell down positions and watch how this plays out.

 

Since identifying the Apple August low our E Weather option LEAPS

trades have generated gains worth holding on to.  It is a very special thing to be in tune with the action of a leadership stock like Apple.  Our 12 trades since

August 25th have yielded 11 winners and 1 loser:

 

14% allocation of AAPL January 2012 $280 calls 29.00-64.40 (122%, holding)

6% allocation of AAPL January 2012 $300 calls 23.35-52.70 (126%, holding)

5% allocation of AAPL April 2011 $230 calls 35.80-65.50 (83%, sold on 9/23)

5% allocation of AAPL January 2011 $270 calls 23.50-31.00 (32%, sold on 9/23)

2% allocation of NFLX March 2011 $120 calls 33.50-47.00 (40%, sold on 9/23)

2% allocation of AAPL April 2011 $260 calls 26.60-43.00 (62%, sold on 9/23)

5% allocation of AAPL April 2011 $290 calls 26.00-39.00 (50%, holding)

5% allocation of NFLX March 2011 $150 calls 30.60-26.40 (-14%, sold on 10/1)

5% allocation of AAPL November 2010 $270 calls 22.00-42.00 (91%, sold on 10/19)

5% allocation of AAPL November 2010 $290 calls 15.00-25.00 (67%, sold on 10/19)

5% allocation of AAPL January 2011 $290 calls 22.00-29.00 (32%, holding)

5% allocation of BIDU January 2011 $100 calls 10.00-15.40 (54%, holding)

 

Overall, the Economic Timing portfolio mix of ETF’s, stocks, options and

cash is up 71.4% since August 25th.  We are in the process of

finishing up the October newsletter and wanted to give a quick heads

up as to current conditions.  Washington will determine the next move.  

 



Disclosure: long AAPL, BIDU, NFLX
Stocks: AAPL, BIDU, NFLX