We've been waiting for a pullback for sometime. The opportunity that this will begin to open up will be incredible. Remember when we bought the March 100/110 spread & the January 110/120 spread....remember the environment we were in when we started to scout for those setups. We weren't buying those kind of trades at the top range.
Today marks the first day that the rally has really started to crack and begin a new pullback or consolidation stage. We will be looking for our next big AAPL trade somewhere around here as this pullback develops further...as this new trend starts to manifest itself we'll be able to better understand the potential levels AAPL is most likely to pullback to.
So what happen today thus far is significant. AAPL hit a peak toay of $142.80, all of which has been nearly revered so far. Now with Apple gapping up as much as it did today and then reversing that sets in motion a very bearish tone moving forward on the near term & possibly intermediate term time frame. We haven't seen that in a while because the stock hasn't been really gapping up. The stock has been opening up pennies and then running in a northerly direction. We've had a few bearish signals on AAPL suggesting the top was around the corner but now you have the first fledged day that marks the start of a top of some kind. Confirmation is needed in the following sessions but we're pretty confident that today marks a short term or intermediate term top of some kind.
Also, today Apple hit a key milestone of a 17 P/E ratio. That number has represented a peak for Apple in the past. For example, in all of the 2013-2015 bull run in Apple, the stock only rose above a 17-P/E ratio very very briefly at its peak in late 2015. See below:
So now we have Apple coming up against historic valuation ceilings as well as this record technical run. At a 17 P/E ratio and $700b+ market capitalization, Apple isn't undervalued anymore. I wouldn't say it is overvalued either, but it is at a historic peak in its valuation. And that comes really early in this cycle. So that's a bit concerning long-term for Apple.
Now the other thing to realize here is this. Suppose Apple does breakout into the $140's here and runs further even after today's reversal. Now what? What's difficult to understand here is what investors feel they have to gain at $150 a share. Apple will have surprised all of the recent price-hikes. The stock will cross into a much higher valuation. What exactly is the expected upside at that point? Those concerns will put some resistance in the stock in the $140's. But at any rate, right now, the stock is at that breakout threshold and today will be a key session for Apple. For one, the stock is finally coming off of those extreme 80-RSI prints. So a breakout here would undoubtedly force the stock back above 80 and into extremes once again. The stock will have been trading in overbought territory since mid-January. That is two and a half months of 70+ RSI trading.
AAPL closing below $142 today would be NET bearish for the stock. It will mean the entire move today is invalidated and that the only positive gains that were had came from pre-market trading (not intraday trading).
One thing that we're going to start going over as this topping process works itself out is the incredible opportunity that this will be opening up to us. We're going to be focusing on modeling out trade setups heavily armored conservative call-spreads that will yield more than 2x to 3x returns
--Post being updated --
FUNDAMENTAL NARRATIVE:
Now on the fundamental side of things we can see how the technicals play in lock step with the narrative playing out overall. The market has experienced nearly 10-day streak of low volatility is over as the S&P drops 1% for the first time since October. This selloff is being led by banks at -2%. It's interesting to note the underlying reason. Fed rate hikes didn't do it, debt ceiling didn't do it, travel ban didn't do it, retail traffic dropping 13% in the 3rd week of March didn't do it, a used car price collapse didn't do it...instead, credit for this selloff goes to Washington. Conservative House Republicans appear unwilling to join the rest of their party in its Thursday vote to replace Obamacare. This is the first real test for Paul Ryan and President Trump. If the party is fractured, a defeat in Thursday's vote would send a clear signal that the rest of Trump's agenda is in trouble. Trump himself warned there will be no big tax cut until Obamacare is repealed. If today's Dow -200 performance is followed up with additional selling into Wednesday, Thursday and Friday it may be time to declare a trend reversal caused by Trump's inability to pass legislation. Not only is healthcare in doubt, but a delay in tax reform, deregulation, infrastructure, budget and debt ceiling are also risk factors the market will have to deal with. All-of-a-sudden, Thursday's House vote is a major market catalyst. We do anticipate central banks will utilize helicopter money to prop equity markets into the weekend, nevertheless, in an environment of real risk it makes sense to proceed with caution by adding hedge exposure. If central banks continue to do what they have done over the past year then this uptrend should continue and we will average into narrow leadership most notably on AAPL, FB, & GOOGL as our 3 major horsemen. Right now we're largely allocated in AAPL but moving forward we're going to be scouting trade setups on FB & GOOGL. All 3 companies are leadership stocks deserving of overweight allocations. We will also be discussing a hedging strategy to protect the portfolio using conservative SPY puts, USO puts and UVXY. Turns out last week's Fed decision was not the key pivotal point; Wall Street is proving to be more anxious about this week's House vote. If downside momentum does materialize, it represents one of the best money making opportunities of the year. Investors have been waiting 110 days. We will be able to protect ourselves in both directions, for now we're not making any firm claim that the market is in trouble here and this is a top. To the contrary, this is still very much a buyers market and the benefit of the doubt continues to go to the BULLS. Don't make the mistake of thinking that todays move in the broader market is the beginning of a top. Near term yes, but the primary term still shows lots of upside momentum.