AAPL

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We think AAPL has gotten way overextended. Maybe it breaks down from here, with a significant and decisive break of both its moving average and trendline. Or maybe it manages to keep itself within the channel, wedging itself into the little triangle formed by the ascending trendline and the horizontal support created by its October and November highs. From there, of course it could break strongly to the upside. But there's no way of making either of those calls right now. Our warning on AAPL shares are more rooted in the company's size than anything else. AAPL is simply too large to keep growing at its current pace, and it has once again nearly maxed out how far it can comfortably push the upper limit of its valuation range.

Let's suppose you could accept that AAPL will grow by 20% annually for the next five years. We find this hard to believe, but let's give them the benefit of the doubt. In that case, paying a P/E of 25 for the stock would be reasonable. Not a bargain by any stretch, but not outrageously expensive either. It would just be a fair P/E for the stock. Let's give AAPL the benefit of the doubt and calculate its current EPS using what they project to make for Dec 09. That would give AAPL an EPS of approx $6 per share. With a pricetag of $196, that gives AAPL a P/E of approx 33. Looking out about 12 months from today, AAPL is expected to have an EPS of $8 per share. If it stayed at today's price of $196, its P/E a year from now would be 25. So there you have it, a stock that should go sideways for the next 12 months, if indeed it wanted to return to a level where its price matched its value.

Considering the stock "should" be at its current price a year from now, there's little risk in buying or shorting it at these levels. It may go higher or lower, or maybe just sideways. But either way, at some point about a year from now, it'll be back at $200 again. We posted similar comments about AAPL's valuation last time it reached the $200 mark. So how do you profit from this? What we like to do is plant this seed in our head, and then watch the chart. If AAPL continues moving higher, our interest in shorting it increases. Perhaps in a month or two, it'll be trading on 2011's EPS. That would make shorting it a whole lot easier. If we thought it was high at $200, then it'll be a screaming short at $250... with a P/E of 42.

We don't actually short individual stocks, especially ones that are trading above an uptrending moving average. But it's still worth keeping tabs on where the four horsemen of tech are trading. They give you valuable insight into how rich the market is becoming. AAPL strengthens our thinking that the market itself is in its early stages of an overbought condition. Each step higher from here, the market is playing an increasingly dangerous game of musical chairs. When the music stops, there won't be any buyers left to fill the sell orders of those who want to take a seat on the sidelines.

Gold's Top

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Stock charts typically get a certain amount above their moving average before falling back to reality. For gold, an overbought condition exists when the chart is 40% to 50% above its moving average. It doesn't matter what average you use. The percentages will change, but can still be used as a basis for comparison against each other.

The chart above shows that GLD (gold) is quickly reaching an overbought condition. How far could it go? Every 9 points represents another 10% rise above the moving average shown on the chart above. Therefore, a jump of 9 more points to a price of 125 would put GLD at 40% above its average. A jump of 18 points to a price of 134 would put GLD at 50% above its average. We're not saying that it won't go there. Of course, we don't know. But we do know that if it does reach those heights, particularly if it happens quickly, the chart is setting itself up for a dramatic return to the average.

The last two times GLD corrected, it fell roughly 25% to 30%. A repeat of this kind of correction would put GLD somewhere between $80 to $100 per share. There are few people out there at this point that don't already know that gold is the new hot investment. In fact, infomercials are popping up which are selling gold as the new investment vehicle of choice. The guy at the corner deli just bought some gold for the long term. If that doesn't signal a top in the making, we don't know what does.

In an ideal world, gold would quickly "blow off" to an incredible height (like $134) . From there, the downside risk would be too great to ignore, and people would start heading for the exits, leaving the guy at the corner deli holding the bag. This will surely be a fun chart to keep tabs on.

Gold

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The chart above shows the past 4 years of GLD, which tracks the price of Gold. We would never short a stock trading above an uptrending moving average, but we would lighten up on GLD at this point, and continue to lighten up on it if it advances from this point. We're not saying it can't go higher, but that if it does, it will inevitably return to its current price sometime in the next few months. In other words, it isn't about to get away from any potential buyers at this point. Don't chase it. Although very bullish, this chart looks ripe for a 7%-8% correction (at least to the low 100's).

The Dow

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Is there anyone still reading this blog? We lost interest in the market for a while, but a recent glance at our account piqued our interest again. We're actually in the black since we started the blog in mid July. Barely in the black, but heck, flat is the new up.

Every time the market nears the top of the channel, we get tempted to drop DDM and SSO, but it never spikes high enough to tempt us that much. If we had a quick spike to the area of the red line, we'd sell it all and just wait. We still think that despite all of this recent strength, the market is just finding the top of a new sideways channel in which it will live for the next two years or so.

Before we have any truly sustained (multiyear) bull market, we need new innovation, which doesn't exist right now. When "the next big thing" comes along, this blog will be all over it. Finding the next leaders is what we do best. Well, that, and pointing out when they die.

But for now, the best we can do is stay long with a third of our stock portfolio and try to play the channel with some portion of those long holdings, all the while avoiding overexposure. At some point, the market will hit the top of its new sideways channel and then feel around for a bottom. Maybe sideways from 8,000 to 10,500 for two years? How does that sound? Your guess is as good as ours. We'd like to hear what others think the near term future holds.

More important than guessing the market's next direction is now trying to find that "next big thing." You won't find it any earlier than anyone else. You just have to understand it sooner.

We're most interested in any help we can get in spotting the next major phenomenon. Let's all work together and make the next bull work for us!

Bernie gets 150 years

What a light sentence, just a year for every 27 million stolen... from charities no less.
Bernie should have gotten a year for each $20,000 stolen, much like "blue collar" criminals would have gotten. That would put Bernie behind bars for the next 200,000 years. But as a "white collar" criminal, Bernie gets a slap on the wrist like his other Wall Street peers.
Of course he'll die in jail, so it doesn't really matter what his sentence is from that standpoint, but for those of us doing the math, white collar crime is looking like a good way to make a living.
Perhaps the criminal system will redeem itself somewhat and lock up everyone who was in on the scheme, including his wife and his sons.
Nonetheless, Bernie's sentence restores some of the faith that we all lost in Wall Street over the past few years. Maybe just 1% of it, but it's a start.

Selling DDM and SSO

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This may be a bold move, but Tuesday, June 15th, we're going to sell just about everything. If you look at the chart that we posted on April 8th, we extended the lines out in such a way that the Dow would reach the 200dma sometime in June at a price of 8400 to 8700.

That's pretty much was has happened. But the eerieness of the predictive nature of that line drawing is not why we're selling.

We're selling because we're in a bear market, trending lower below a downtrending moving average and we just rallied back to the resistance line. We're by no means calling for the kind of plunge that we drew on that chart posted on April 8th. This is not meant to be an apocalyptic post calling for the end of the financial markets. That ship has sailed. We're not saying that the market is about to crash, but that we feel we've gotten to a point where the risk outweighs the reward. People have become complacent, and the fundamentals do not support complacency.

Sure the market could continue its run to 9500. But if it does, it's coming right back. So where's the gain? It's extended to a point now that a further rally would be excessive. Not impossible, just excessive.

Economists are calling for growth by the end of the year. We feel they are being too optimistic and setting us all up for disappointment. Gas prices are on the rise again, talk of higher interest rates has curbed spending, and the job market has yet to improve in a significant way. So where have we gotten since hitting bottom in February? Did we deserve the last 2,000 points? We happen to think we did, as the selloff was overdone. We just don't think we deserve another 1,000 points. Or even another 500 for that matter.

People are treating this market as if we're setting up for the next bull. We're nowhere near the next bull market. A bull market is not just an uptick in the stock charts. It's a whole new era in innovation, creativity, technology. When Al Gore invented the internet we had a bull market on our hands. This is NOT a bull market.

We're not suggesting anyone should follow us in selling everything. We just decided that it's time we start making bolder moves with our portfolios, and letting our gut have greater influence.

We continue to believe in our earlier forecast that the market will remain rangebound between 7000 and 9000 for the remainder of the year, and only slightly improved (7500 to 9500) throughout 2010.

So here we find ourselves at Dow 8600 weighing 400 points of upside against 1600 points of downside with the tune "you gotta know when to hold 'em, know when fold 'em, know when to walk away and know when to run" going through our heads. Thanks Kenny.

Sorry for not being more active blog authors. We do read the comments that everyone writes, but time constraints keep us from posting more often. There's also no need, as one post pointed out, to keep reminding everyone on a daily basis that the market is rangebound.

After selling tomorrow, we will likely post more often, as we'll be looking to get back in soon enough. Good luck!

200 DMA

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We just updated our performance for the first time in a while, and after one year on this blog, we are down 6.8%. The Dow is down 30.1% over the same time period. Not a great year for us, but we did manage to not lose big, and that's what 2008 was all about.

As for the market, we were hoping for Dow 9,000 as an opportunity to sell some shares, but we're hitting a major hurdle right now. We've run into the all-important 200dma. The 200dma is universally used to distinguish between bull and bear markets. It's the dividing line, so to speak. Technically, this would not turn into a bull market until we're trading above the 200dma and the 200dma is moving up as well. This takes time. For now, though, a significant break of the line would be a major milestone for technicians, and give hope to all that the market has finished its slide.

If we were more heavily invested at this point, we'd be lightening up on some of those shares right in here. However, considering we're only about 1/3rd invested, we're just going to wait and see. If the market does get rejected at the line and resume its fall, we'll just be adding to our position all the way down. It's hard to believe that we could possibly launch any kind of sustained bull market given there's no new industry or invention driving it. All we've really done over the past couple months is make up for a severe over-correction in the market. Hardly a bull. If we had to guess, we would vote that the market drops from this point. However, Government Sachs may have a different idea for the near term future of your 401k that we're not privvy to.