Market Sees Some Distribution, Tech Steamrolled On

Thursday, September 23, 2010

Market view was right but stocks kept running

The S&P dropped 0.83% today back to the 1,125 level closely watched by technicians on the way up. My topping view of the market has been fairly decent the last 3 days as I sold out of most of my stocks on Tuesday before the Fed meeting and the market is now down 1.6% since Tuesday's open. Yet, the high beta names, the primary stocks I was holding (AAPL, BIDU, NFLX and others) kept on trekking higher despite broader weakness as financials dragged the market lower. But, I think today's high in Apple (AAPL) and Amazon (AMZN) will stick in the short-term as this marked the first real intraday reversal to the downside (excluding the Fed-day nonsense) in this entire rally.

In hindsight, I am really not too upset with the timing of my sales. While a stock like AAPL continued running after I sold it, I bought it at $245 and sold at $283 for a 15% gain in just 3 weeks, it continued running to $293 this morning giving me the aggravation all traders feel when a stock rolls on past your sale. Yet, there was a famous investor (I can't remember who and can't seem to find the guy's name, do you know?) who said something to the effect of: "I'll give you the first 10% and the last 10%, just give me the 80% in the middle". I think it's always important to remember that the point of investing/trading is to make money, not to make the entirety of every move. I just hope AAPL lets me back in on a pull-in because I still believe it's a $325 stock. I expect that I will be able to buy it lower with a better risk management strategy than just holding shares to position for another wave up.

To be clear, I am still bullish long-term

I took off all my positions except Google (GOOG) because I was expecting this pull-in we've started to see. I think the leaders are ready for a pause and I would love to buy them back at lower prices. I am trading on a multi-week horizon and trying to take advantage of fluctuations on that timeframe. To be very clear though, I remain very bullish on stocks on a multi-month to multi-year timeframe. The S&P 500 is up 0.87% year-to-date as the 9th month of this year is coming to a close. In a macro technical sense, we saw an 83% rally off the March 2009 lows and 2010 has basically served as a consolidation year. The initial reflation trade was fast and furious as the economy and stock market rebounded from horrible conditions. I believe it was Peter Lynch who said the best returns in the stock market are achieved when things go from terrible to bad, and boy was that true again.

The general concept of shorting stocks seems only useful during anomalous times, like the Panic of 2008, and for particular dying companies that you have studied in-depth. Otherwise, the machine is built to go higher. Every person across the globe is working everyday to improve their lot in life and I am a strong believer in human ingenuity and the innovative spirit. There will always be financial excesses followed by financial contractions as markets oscillate around the correct intrinsic values but the long-term trend is and always will be higher. (ps. Prechter is on crack, yes, he definitely is) With that said, I will always try to forecast corrections in the market and get out of the way but there's a reason short-based equity hedge funds are down over 5% on the year and represent the worst class of hedge funds. Shorting is just really hard even when markets are flat because shorts are quick, panic-driven and often not foreseen. And, since I think Dow 20,000 is just a decade around the corner, I will continually have the mindset of buying good companies on pull-ins and maintaining the discipline to sell into strength. I am actively gauging the market to begin buying again on this pull-in now.

Holding Google (GOOG) because it's a different trade

I am holding GOOG long because I think this is an off-cycle trade that will take a bit longer to play out but is well worth being in. Shares of GOOG finally found momentum after investors read my post arguing for a $700 price target (or maybe it was Piper Jaffray's positive report but who's counting). I think the market is vastly underestimating the power of the Android platform and how accretive it will be to earnings going forward. Some recent exciting news items have escaped broad attention: Dell is releasing a 7" Android tablet. Also, noted Piper Jaffray analyst, Gene Munster, said: "Long term, we believe Android could surpass the iPad in tablet market share due to devices from numerous manufacturers." I agree, Gene, and I'm holding on.

Brandon R. Rowley
"Chance favors the prepared mind."

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