Which Way Wednesday: Is The Appleconomy Over?

by: Philip Davis

Apple (AAPL) is a total disaster.

There's no denying it now, they had their iPad Mini event yesterday and investors charged out of the stock, dropping it from a high of $633 (which is already 10% off the Sept highs) to close at $613 and that was finally weak enough to get us to capitulate and roll back our AAPL positions to longer-term trades that have less upside but, more importantly, less downside as we are no longer confident they'll be able to turn it around on Friday.

Notice how silly it seems to talk about how poorly AAPL is performing when the chart pretty clearly indicates it's the greatest stock on Earth but that would be the logical conclusion for a company that's on track to earning $43Bn this year, which is $81,811 a minute - more even than what they were tracking to make last month when I set out bottom target at $600 (and that spread is an even better buy now) AND, only 68% of what they are projected to make next year.

We didn't really think it would hit $600 - that was our worst-case but here we are - at the worst case and, since we are no longer able to say with conviction that it can't get any worse, we had to back our short-term plays to something that buys us more time. In that same post we liked Hewlett Packard (NYSE:HPQ) at $14.30 and at least they are holding that line and we also had a nice spread on that stock in the same post, which is still holding up as a new spread.

In that post I mentioned (as usual) our primary hedge being TZA and the straight-up April $15 calls mentioned there have gone up another .40, from $2.50 to $2.90 off our $2.10 entry (up 38%) - not bad against just a 15-point drop in the Russell (down 2%).

Yesterday, with our hedges already in place (see last Wednesday's TZA hedge and this Monday's DIA hedge) we had the luxury of doing some bottom-fishing yesterday with long trade ideas on TiVo (NASDAQ:TIVO) at $9.78, USO at $31.75, AAPL at $623, Chipotle (NYSE:CMG) at $238 and our last trade idea for the day was SQQQ at $41.20 (that one, of course, is another hedge - always look for BALANCE!) - just in case things kept falling apart.

These are, of course, hedged plays using options for leverage but, as I often say to stock players, if we like a stock leveraged with options - of course we like the straight stock as well - but we'd prefer it if at least you sold the covered calls! This morning we had a wide-ranging discussion in Member Chat about AAPL and a long trade idea for the QQQs $65.39), CostCo (COST) ($95.18), AMD ($2.14) and Universal Bioenergy (UBRG) (0.01). To give you an idea of what we mean by leverage and hedging - here's my trade idea for AMD from this morning's Member Chat:

See how that works? Rather than spending $21,400 cash now in our virtual portfolio to buy Advanced Micro (AMD), we use margin to collect $4,200 in cash against our promise to buy AMD for net $1.58 in Jan 2015, which is 26% off the current price. So the play is self-hedging against a 26% drop, ties up no cash (we have a credit) and can net us a $19,200 profit in 2 years if AMD just goes up .36 (17%). Aren't options fun? If we bought the stock, AMD would have to go up 90% to make the same $1.92 per share and, of course, we'd want to protect it and that might cost us some money anyway.

As I mentioned yesterday, part of the market weakness was a result of Dollar strength and the Dollar climbed all the way to 82.23 yesterday as the Euro was slammed all the way down to $1.92 on the usual paranoia caused by the dysfunctional EU. In pre-market trading, the Dollar fell back below 80 and, if it stays down there, we have a chance for a nice bounce today. Without taking the time to explain our system again (the 5% Rule) - the lines to watch today are:

  • Dow 13,200 is a weak bounce, 13,300 is a strong bounce (we don't become more bullish until we hold strong bounces through the close).
  • S&P 1,420 is weak, 1,430 is strong.
  • Nasdaq 3,030 is weak, 3,060 is strong, 3,000 must hold.
  • NYSE 8,250 is weak, 8,300 is strong
  • Russell 815 is weak, 820 is strong

So we're not going to be in the least bit impressed by any move today that doesn't hold our weak bounce lines and we're still going to be very cautious until those strong bounce lines are taken back. We have a Fed statement this afternoon at 2:15 and then it's all up to AAPL tomorrow night. PMI reports are improving in Asia but falling still in the US and Europe so no help from that data.

Bottom fishing is fun but watch out for the holes in the ice!

Disclosure: I am long AMD, AAPL, CMG, HPQ, QQQ, TZA, USO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Positions as indicated but subject to change (fairly bullish mix of long and short plays - see previous posts).