New Tech. New Mania. Old Bird. (AAPL)
Ever since we gave up horse travel for railroads, folks have been giddy-up giddy over the latest tech innovations. Investors, too, saw fit to jump from the buggy to the railcar to the telephone to the phonograph without missing the chance to be the first to own the latest.
Some inventions, of course, came and went and made their splash before being ousted by newer, trendier, or cheaper ideas (think Polaroid, Atari and the Commodore 64).
But others have stayed. And a number have profited wildly as the pace of changed revved higher over the last quarter century.
We needn’t name names. It’s clear who we’re talking about. Many of them were part of the boom and bust of the dot.com bubble at the beginning of the century, while some emerged later, like Facebook and Netflix.
What we’re currently witnessing is something that has the makings of an equally troubling bubble – a nascent tech bubble, less than twenty years after the first.
Consider – the biggest five tech stocks in the country tacked on close to $700 billion in the last six months. And that’s not a typo, friends. SEVEN HUNDRED billion.
A look at the following chart speaks volumes. It shows the value of Apple, Amazon, Alphabet (Google), Facebook and Microsoft. And it’s truly extraordinary –
Absurd, or just fair market value?
Those five stocks went from a collective market cap of 2.2 trillion bucks on the eve of the election to $2.88 trillion as of the latest read.
Something else, hunh?
We’re not going to comment, except to say that these five outfits now comprise over ten percent of the value of the entire U.S. equity market, and taken alone, are more valuable than any single equity market save China, Japan, Hong Kong and Britain.
The worry, of course, is what happens to these creatures on re-entry. Do they burn up in the atmosphere? Do they crash into a million bony fragments on the Serengeti Plain? Or do they remain in orbit indefinitely, as some presently imagine?
We’ve a hunch the final phase won’t be a pleasant thing to watch.
But in the meantime, we don’t argue. These suckers are rising, and as we’ve repeated in this space ad nauseum, this is the ‘Facebook market’, and the world’s biggest time waster will eventually soar to unimaginable heights before this last, greatest bull market in history breathes its last.
Have a look here –
It’s a chart of annual cash flows into and out of tech stocks for the last sixteen years.
And as you can see, the trend this year is outrageously bullish.
If things continue, we’ll see cash pouring into the tech sector at a rate that exceeds anything witnessed since records for the series began nearly two decades ago.
Suffice to say there’s a great deal of confidence in these birds’ ability to fly.
Before we offer you a trade for the week, we’re going to look back at an initiative we initially launched back in February, in a letter called Overripe Fruit. You’ll recall that our recommendation was to sell ten (10) AAPL February 24th 135 CALLs for $0.18 each and one March 24th 134 CALL for $0.84, for a total credit of $2.64.
Three weeks later, just prior to the February CALLs’ expiration, when it was clear we were going to be saddled with a very large short position in Apple stock, we penned a second piece regarding the venture. The letter was called From Trump Tower to the Seeonee Jungle, and in it we bewailed our misfortune, as Apple stock had risen well beyond our expectations, leaving us with an inevitable PAPER loss and the need to take immediate action.
We advised as follows –
“First, sell ten PUTs to close out the short. We’re using the AAPL March 31st 136 PUTs, each of which sells for $2.17. Your credit on that segment of the trade is therefore $2170. If the stock closes below that level by expiration, you’ll automatically be bought back in.
Beyond that, we’re also advising you to take those proceeds and buy ten March 3rd 137 CALLs for $0.85 each, for a net total credit of $1320. Should the stock trade north of 137 by this Friday, you’ll also be bought back in.”
As it turned out, the CALLs were tripped on the third of March, as we wrote on our March 7th letter, Finally, A Financial Ever-gasm!, closing out the short and leaving us with a net loss of $416 on the trade, with 10 short March 31st 136 PUTs and one short March 24th 134 CALL still open.
So we took further action.
In that same letter, we advised you to buy back those 10 short March 31st 136 PUTs for $1.01 each and sell ten (10) AAPL November 17th 105 PUTs for $1.41 each. Total credit on the venture was $400.
As it now stands, Apple has to lose a third of its value to put the 105 PUTs in danger, and we don’t see it happening. So we’re going to leave the PUTs to ride, as they cover the $416 loss (save $16).
What we do have to address, however, is the March 24th short CALL, which was triggered at expiry and has us short a single board lot of the shares at $134 (AAPL is now at $153.06).
To understand our next move, take a look at the chart –
A full year’s trade shows both a spectacular gain (71%) and the likely upcoming retracement levels, according to a simple Fibonacci calculation (in blue).
We’re going to bet now on AAPL falling to at least the first FIB level (131), and possibly the second (116), in the next half year. RSI and MACD are also supportive of further declines, as they’ve been diverging negatively from price for three full months.
With our current (paper) loss on the trade at $19.06 (153.06 – 134), we’re going to sell PUTs to assist in recovering that amount, and buy a call to cover ourselves should the stock trade higher.
And it goes like this –- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew