Meta-Trader - Apple Trendline Break

Welcome back Meta-Traders.

 

It was another spectacular week in the markets.  Gains were broad and across the board with SPY +2.1%,  DIA +1.82% but QQQ leading the pack up +3.78% for the week.   We also had healthy gains in Europe and Emerging Markets with EEM +3.39% as the ECB finally dropping interest rates for the first time since July of 2012. 

Those who subscribe the "Sell in May and go away" theory missed a monster rally on Friday May 3rd.

 

But the big story was AAPL where we finally had a break of a huge 8-month trend line set from the top at 700 set back in September of 2012.  This came on some big fundamental developments which i'll cover below. 

But first, why do we care?  We care because AAPL has a larger capitalization of any stock in the US Market.  So AAPL has a huge impact on the markets themselves.  We also care because AAPL is such a big point mover, about 30 points this past week and the week prior.  So we can make good money trading delta .7 options on this stock. 

And we care about this move because history has shown that trend line breaks often signal the beginning of long-term shifts in price action.  There's a tendency to think that you have to be super-smart to make money in the markets, that to have to be looking at something that nobody else is looking at.  I would argue the opposite - that the big money is make on the big, obvious changes in character like this one here.

Well at this point, the stock is clearly extended, having gone straight up almost 10 days straight.  So I am  not saying that AAPL is a screaming buy here.  Its just that we have clearly switched from STFR (Sell the F'ing Rally) to BTFD (Buy the F'ing Dip) in John Carter parlance.  Now what fundamental developments have occurred here that we need to know about?

Well on Tuesday afternoon, AAPL released earnings along with a number of moves to redistribute part of its huge cash horde to shareholders.  In fact, at the beginning of the conference call, you could here the relief in Tim Cook's voice that he was finally bowing to some of the relentless pressure he has been under to do something about the 40% loss of Market Cap the stock has seen in a mere 7 months.  Here's what they came up with:

• Increased repurchase authorization to 60 B by the end of 2015.  With a current capitalization of 418 B, that will reduce the number of outstanding shares by 14%, thus increasing the per share performance of the business for existing stockholders. 
• Increased the dividend 15% to $3.05 per share per quarter
• Accessed the debt markets in the largest single corporate debt offering in history borrowing 17 billion dollars!
  

This last item is pretty significant since AAPL has traditionally avoided financial engineering of any sort, and almost ignored its huge cash position and instead, focused on just making great products.  With this move, AAPL is borrowing at record low interest rates to retire stock and avoid having to pay taxes on income earned overseas.  They are clearly listening to their shareholders, and activist investors. 

I would not consider buying the debt, since it pays only slightly better than US Treasury securities.  And I am not a debt investor anyway.  What it does say is that APPL thinks they can provide a better rate of return on the capital borrowed from these investors than they are paying them to borrow it.  Phrased another way, they are selling puts on the cash to the bond investors and buying calls on their own stock.  Which side of that trade would you take?

As for the stock, its going to have a long road back to the all-time highs at $700.  For active trading, I also have an eye on Google (GOOG) which on Friday took out its all-time closing high.

That's enough for today.  Go forth and enjoy the fruits of your labors.  And enjoy your weekend.