Tharp's Thoughts Weekly Newsletter (View On-Line)
Solving the Mysteries of Apple Stock by Van K. Tharp, Ph.D.
Is the News Driven Market Behind Us? by D. R. Barton Jr.
Gold Analysis and Strategy: January 28th 2013
$700 Discounts Expire Today on These Two February Workshops Which Are Essential for All Traders
Most traders take one of two routes when it comes to trading systems. However, both of those approaches tend to produce inconsistent results at best, and at worst, cost you a lot of time and money. In the How to Develop A Winning Trading System Workshop you'll learn the important factors that you need to know to create a system or have the skill in place to modify an existing system to fit your own style.
In the Blueprint Workshop learn to develop your own personal roadmap with the help of an experienced guide. Some people take years to discover just a portion of what you are going to learn in a 3-day period.
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Solving the Mysteries of Apple Stock
I have an email subscription service from a website called Seeking Alpha and it seems that most of the emails I have been receiving have been about AAPL stock. Half of them tell me why I should invest in AAPL (even at $700, it’s a great value and it is expected to hit $1000) versus why I should sell APPL (too pricey and should go down from here on out). These varied recommendations happened as AAPL rose from $300 per share to just over $700. It’s happening again as AAPL has fallen from $700 to its current price of around $440.
For example, between January 25th and January 28th, the various AAPL headlines read:
- AAPL: Can You Still Own Apple? Suggests that you should own Apple but write covered calls. By the way, a covered call is equivalent to a naked put. Would you want to own a naked put in stock that’s falling like AAPL?
- MIA: Apple Investors. This article tries to identify the culprits behind the fall in AAPL stock. What an insane, non-productive article; but aren’t they all?
- Apple is no longer a “Don’t Buy”. Basic, great advice - that Apple will eventually rally.
- Apple’s Brand-Image Matters more than the Innovation. Claims that Apple's brand is a fashion statement, which gives value to the stock.
- What is the fair value for AAPL in the Newtonian World? The article suggests that AAPL is significantly undervalued (whatever that means).
- Lessons Learned From An Apple Bull. Written by someone who rode Apple all the way down and now is talking about his lessons learned. (My comment - he didn’t learn anything.)
- Don’t Believe the Hype: Apple’s Growth Story is Not Over. AAPL is 25% undervalued.
- Apple: The Absurdity of Market Expectations. AAPL is now a value play.
- The Missing Case of Apple’s Mysterious Growth. AAPL is still a growth stock.
- Why Apple will Beat the Street. Obviously written a few days before it didn’t.
- Apple is Offering an Excellent Entry Right Now. The headline speaks for itself.
- View Apple by Seasons, Not Quarters. I just didn’t bother to read this one.
- Apple’s Price Target: $950/Share. I didn’t bother to read this one either, but it’s obvious he’s bullish.
I did find one interesting article about how Microsoft has committed financial suicide with the release of Windows 8 (by the way, it’s not any worse than Vista but it is bad). The only other interesting article I found talked about how MSFT went up while AAPL went down with similar, new releases.
None of these articles, however, provided anything of value for a trader. I’m not even sure articles would be useful as a measure of consensus, but while AAPL is going down, they are generally bullish. I regret not keeping some of the articles during Apple’s up move. They all indicate, to me, that a lot of non-traders write articles and probably don’t make money in the market.
How Does Van Think About the Market?
This one is not rocket science. I would look at certain fundamentals, but pay very little attention to them. The two fundamentals are:
1) Who is running the company and what is that person’s track record?
2) What’s happening to the company’s earnings?
So let’s look at Apple’s fundamentals for the past year:
As for “Who runs Apple?”, there have been two major, recent headlines. First, on August 24th, 2011, Tim Cook took over the company from Steve Jobs, who was fighting for his life. Second, On Oct 5th, 2011, Steve Jobs died.
So what happened to the company during that time?
As you can see from the chart, not much happened. AAPL stock was pretty choppy during that time, but within months after Steve Jobs died, AAPL made a huge run up from $375 to just over $700. I personally got about half of that move, but only after I kept seeing so many articles on AAPL. It looked like a 1999 growth stock. In fact, it now looks like a 1999 growth stock in year 2000! QCOM anyone?
The only other fundamental that I might pay attention to is what’s happening to earnings. Through the third quarter of 2012, everyone loved AAPL’s earnings; however, the last two quarters have been huge disappointments. You only know this information, though, after the fact.
The far more important thing I pay attention to is: “What's the stock price doing?” Look at the huge run up in early 2012. Making money in AAPL was like taking candy from a baby. If you were not in some way participating in that, then you probably don’t have a method that allows you to participate in large trends. I found AAPL at $502. I sold it at $545, not because I didn’t like it anymore, but because I was going to Australia and it would be difficult to follow. I avoid holding a position that I might not be able to watch when I travel. Thus, I missed the run up to $600 and I chose not to participate in the run up to $700 because it was not as clean.
However, some people bought apple at $400, rode it up to $700, and probably still own it at $440. That’s giving back a lot of money.
Another Way to Trade AAPL
Let’s say we used a simple moving average based system to trade Apple during the same period. I’m not recommending that you trade AAPL this way because we teach much better ways to make money in our workshops. However, what would have happened if you just took signals based on price crossing the 60 day moving average during the run up from $375 to $700 and then back down to $440? I picked 60 days just because it is big enough not to get whipped in and out too often.
Let’s say your stop was initially $10 and then became the 60 day moving average. If the price goes through the 60 day moving average, you buy a long position and close a short position. Whenever price drops below the MA, you close your long and go short. In other words, it is a straightforward stop and reverse system. The initial stop is to protect you just in case of a very adverse move against you as soon as you enter. Let’s say our risk is $1000 each time (or $10/share on 100 shares).
Using that simple rule set, you would have made 8 trades in AAPL since Dec 2011. While I don’t recommend trading crosses of a 60 day moving average, it does work when in a stock like AAPL, which has had huge trends over the last 14 months. So let's look at the trades:
- Trade 1: We buy AAPL on 12/23/11 at $389.00
- Close: We sell AAPL on 5/4/12 at $574.86
- Trade 2: We short AAPL at 5/4/12 at $574.86
- Close: We cover our short on 6/18/12 at $583.28
- Trade 3: We go long AAPL on 6/18/12 at $583.28
- Close: We sell AAPL on 6/19/12 at $583.67
- Trade 4: We short AAPL on 6/19/12 at $583.67
- Close: We cover our short on 6/29/12 at $578.00
- Trade 5: We go long AAPL on 6/29/12 at $578.00
- Close: We sell AAPL on 7/25/12 at $574.97
- Trade 6: We short AAPL on 7/25/12 at $574.97
- Close: We cover short on 7/26/12 at $590.20
- Trade 7: We buy AAPL on 7/26/12 at $590.20
- Close: We sell AAPL on 10/29/12 at 648.25
- Trade 8: We short AAPL on 10/29/12 at $648.25
- Let’s say we covered our short on 1/25/13 at $439.74.
Key Points From This Article
My key points in this article are as follows:
First, all of the articles you read about AAPL are garbage. It went up and then it went down. Learning that it’s a growth stock, or a value stock, or a dividend play, or overvalued, or undervalued… Wow, it all makes my head spin. However, that’s why the financial press pays these writers $100,000+ salaries—to make your head spin. Furthermore, you might have to be a top graduate of an Ivy League school to be allowed to write such articles.
Anyway, what kind of trader are you? Do you listen to and read all the nonsense the investment community wants to feed you? Do you believe it or let it confuse you? Or, do you watch what the market is doing and let it tell you what to do? If you are the latter, then should you be long or short AAPL?
Second, I’m not trying to sell you on a trading system, but rather a way of thinking about markets. This can be summarized by:
- Be long when the markets are going up.
- Be short when the markets are going down.
- If you are not sure then stand aside.
What’s Apple doing right now? It’s going down. If you want a position in AAPL, what direction should you take? You should be able to answer that question now; it is very obvious. I’m not predicting that AAPL is going down. It either does go down some more, and if you had been short, the short position makes a good profit. If it goes up from here, you would get stopped out for a smaller profit or a small loss.
Third, this system worked well only because we had a stock with a lot of trending in it. In eight trades we got chopped five times and had three nice winners. However, our average loss was only -0.67R. I’ll take that any day. Our average gain was +12.2R. That’s about an 18:1 reward to risk ratio and we made money on 50% of our trades.
Fourth, I illustrated some position sizing™ issues to think about. You were taking a relatively small amount of risk relative to the price, but AAPL is an expensive stock. If you had a $100,000 account, by risking $1,000 per AAPL position, you risked 1% of your equity initially and then less than 1% on subsequent positions. However, you have to have as much as $64,800 available in your account to trade 100 shares. Therefore, most of your equity would have been tied up in these AAPL trades.
I kept each position’s risk at $1000 for simplicity. More effective position sizing strategies will complicate your math calculations. For example, on your first trade, you made $18,586. If you wanted to risk 1% of your equity on each trade, you would have risked $1,086 on the second trade. Making the small switch from risking $1,000 per position, to a simple 1% of equity complicated your math but it also increased your annual returns by five percentage points for the period, or 11% more profit. Position sizing strategies make a huge difference in your returns.
Fifth, despite risking only about 1% of the starting equity throughout the year, we were still up 43% in our account from trading AAPL. How many of you made 43% trading AAPL over the last year? In fact, how many of you were up 43% overall in 2012? Okay, if I take off the one month of 2011 and the one month of 2013, then the profit from the AAPL trades is probably 35R.
By the way, when I talk about position sizing strategies, people sometimes think risking 2% on a position would be too small to be significant. If you risked 2% on this system—in other words, $1000 per position in a $50,000 account—you would trade on margin throughout these trades. In addition, risking 2% of your equity would have earned about 86% in a period of 14 months. Do you still think a 2% risk is too small per position?
Sixth, there were much better exits for most of our winning trades than waiting for the price to move back to the 60 day moving average line. The chart below shows our eight trades. For example, you should have been out of the first long position well before it hit $600. Notice that our 60 day moving average right now is up at $540. You would be rather foolish to let the current short position go back up to $540—a $100 point loss before exiting. $475 would probably be a reasonable exit for the current short position.
If you don’t understand these basics, then you probably should at least read "Trade Your Way ...", or my new book, Trading Beyond the Matrix. Trading Beyond the Matrix will be released on February 25th.
Rather than preordering the Matrix book now, wait for the discount and bonus offers we’ll be offering for people who buy the book on February 25th. You may receive up to $1,200 in gifts and bonuses—including discounts on our products and workshops—for buying 10 books that might cost you only $220! Buying a single copy on February 25 will also qualify you to receive some of these offers.
Check your email in the next few weeks for a subject that says: “Trading Beyond the Matrix.” And by the way, this book is my favorite of all the books I’ve written and I don’t say that easily.
$700 Discount Expires Today!
The February workshops will only be held this one time in 2013 in the US. We know we've said this a lot, but we received calls and emails all throughout the year last year from people who really wanted to attend Systems or Blueprint and they were disappointed that they didn't realize they would not have more chances to attend that year. So we're really trying to get the word out this year!
How to Develop A Winning Trading System Workshop
This will be the only US date for this workshop in 2013
(The other possible location is Germany)
Blueprint for Trading Success
This will be the only US date for this workshop in 2013
(The other possible location is Germany)
Van Returns to Australia!
Peak Performance 101 - Australia
Peak Performance 202- Australia
Peak Performance 203 - Australia
"The Happiness" Workshop
Oneness Awakening Workshop
NEW Day Trading Workshop with Ken Long
Live Day Trading Sessions with Ken Long
Swing Trading with Ken Long
Forex Trading with Gabriel Grammatidis
Peak Performance 101
Peak Performance 202
Jun 29-Jul 1
Peak Performance 203
"The Happiness" Workshop
To see the schedule, including dates, prices, combo discounts and location, click here.
Is the News Driven Market Behind Us?
The markets have been acting less like a financial marketplace and more like a “reaction engine” —driven by perceptions of the next featured news event. Market pundits far and wide have reminisced and created hype about the next major “uncertainty in the market” (dum dum dum). For an example, look no further than the shameless coverage by CNBC that made the fiscal cliff negotiations seem like an even bigger circus than it was (and believe me, making the members of congress into even bigger clowns than they are takes some doing…).
This really started in earnest last September, when the world waited to see what Mario Draghi and his cohorts at the European Central Bank would do to kick the European debt crisis down the road. Mr. Draghi and company did not disappoint, as he finally stated his evidence to back up the famous “whatever it takes” speech from July. The Dow jumped 245 points on Draghi Day…
For the next week, the financial world was on pins and needles waiting to hear what Fed Chairman Bernanke would announce. Once again, the breathless public was enthralled to hear about “QE Infinity”—quantitative easing for as long as it takes… The Dow jumped another 200 points.
Following this, the market would endure a six week ride of indecision, as everyone waited to see who America would elect as for its 57th presidential term. The market fluctuated but found no directional footing during this period. When the sitting President was re-elected, the market voted a clear “uh-oh”, and dropped 312 Dow points the following day.
After a week of market turmoil over a split congress and a less-than-pro-business president, the market turned its attention to the infamous fiscal cliff. Every whisper of progress sprang the market upward, while any hint of stalemate or political negotiating gamesmanship sent the market reeling to the downside. This whole fandango culminated in a relief rally that sprung the Dow up a whopping 484 for the two trading days straddling the New Year.
The market immediately turned its attention to the debt ceiling. In an interesting turn, the combatants decided that kicking the can down the road early in the negotiation would be politically expedient. The market breathed yet another sigh of relief, driving to new multiyear highs across most indexes.
These new highs were made despite the “darling of the market”, Apple, suffering the biggest corporate fall from grace since the great depression. On the way up, everyone (including me) was quick to jump on the bandwagon with facts and figures on how big Apple had grown. It was, quite simply, the biggest company, EVER. (To my credit, I did use the “too big for their britches” analysis to call for a correction after the iPhone 5 announcement, which was more correct than I could have imagined…) Very few such articles have been written on the way down. Apple has lost roughly a quarter of a trillion dollars in market cap since September 21, 2012—let that number sink in. To put the gargantuan nature of that figure into perspective, it’s bigger than the annual GDP of Chile, Israel or Portugal!
Back to the broader market. For the first time since last summer, we don’t have a financial “Sword of Damocles” hanging over the markets. Furthermore, the market has just shaken off the crash of Apple and marched to higher highs. Investors are happy (though perhaps complacent is a better term), optimism is high and bullish sentiment abounds; sounds to me like everyone is on the same side of the life boat. When that happens, sooner or later we’ll need to watch for the boat to make a sudden move back toward normal. Take a look at the following chart that shows the asymptotic rise of the markets in recent days, weeks and months:
These types of parabolic rises typically don’t end well. However, the size of any pullback could be muted by all the free money flowing from central banks. The day of reckoning that is surely coming from that overly enthusiastic monetary intervention is in the offing, but does not yet appear to be imminent. We’ll resume our series on the role of luck and skill in trading two weeks from now.
Gold Analysis and Strategy: January 28th 2013
by Florian Grummes
Florian has started writing his Midas Touch Gold Report in English again! From time to time we'll share his report with you. Click here to see the January report.
About the Author: Florian Grummes (born 1975 in Munich) has been studying and trading the gold market since 2003. In addition to his trading business, he is a very creative and successful composer, songwriter and music producer.
Van's New Book!
You may have noticed that Van has a new book coming out soon. We are so excited and think it's his best book yet. But here's some contrarian advice:
Don't buy it! (. . . or not just yet.)
You may think we've gone mad, but we have good reasons. If you wait until the publisher’s release date to buy the book, you can earn a slew of promotional offers and free products from the Van Tharp Institute. The publish date will most likely be February 25th, so hold off on the temptation to pre-order it and you will be richly rewarded. We'll give you more details as the time to buy draws nearer.
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