It's that time of the month. It's time to sell. With lines all around the world for iPhone 4,
stock is showing us that it's tapped out on this run. The next couple weeks are going to be very difficult for this market and Apple investors know it. Consider the following:
Bed Bath & Beyond
all disappointed on earnings. Investors are going to assume the worst between now and July 12 when earnings season hits full swing.
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The smartest man in the room,
Chairman Ben Bernanke, lowered his economic expectations. He made it clear that he is willing to lower rates to stimulate growth. This is not what the bulls were looking for.
At this stage of the recovery we want to hear that the Fed is looking to raise rates. Bernanke referred to "downside risks" four times in his testimony and the official statement mentioned that household spending is constrained by high unemployment, lower housing wealth, and tight credit. Which leads us to...
The homebuyer tax credit pushed demand into the fourth quarter of 2009 and the first quarter of 2010. Now that the incentive is over, demand will show a manipulated lull. This is not good timing for a market that is looking for signs of double dip.
Financial reform is in its final hours of negotiation and I am worried about comments from Sen. Judd Gregg (R, N.H): "This bill as it's presently written is going to create a massive contraction in credit, I believe, in the financial markets and on Main Street over the next year to year and a half as people try to adjust to the new standards that are put in this bill."
This bill will require large amounts of new capital to be raised to support derivatives trading. That capital, instead of being used for lending, will be tied up in these new regulatory requirements.
"Derivatives, as we all understand, are the oil and grease that keeps the credit markets going," Gregg said. "If you put so many obligations on them that are arbitrary, which really don't get to the core issue of making them safe and sound and making them as transparent as possible... you're going to, in my opinion, do very little that is constructive and a lot of that's destructive in the area of credit formation in this country."
Investors will be irrationally pessimistic heading into the monthly earnings report on July 2.
Combining these five short-term concerns with the monthly pattern of Apple, we are going to sell out of the following positions:
- 4% allocation of AAPL January 2011 $250 calls;
- 12% allocation of stocks (Ford (F) - Get Report, Boeing (BA) - Get Report, Baidu (BIDU) - Get Report, QQQQ PowerShares Trust 1 (QQQQ) , Devon Energy (DVN) - Get Report
- 6% allocation of the Rydex S&P Mid-Cap 400 (RFV) - Get Report and Health Care Select Sector SPDR (XLV) - Get Report
It always feels great to sell on one's own terms. I never want to be a seller of Apple down at $240 or a seller of BIDU $10 below my purchase price.
With the potential headwinds coming in July, now is the right time to have 68.5% of the portfolio in cash. It looks like the next few weeks will readjust expectations which should be great for the July earnings season. We will be adding a 5% put position shortly.
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At the time of publication, Schwarz was long Apple.
Jason Schwarz is an option strategist for Lone Peak Asset Management in Westlake Village, Calif. He is also the founder of the popular investment newsletter available at www.economictiming.com. Over the past few years, Schwarz has gained acclaim for his market calls on the price of oil, Bank of America, Apple, E*Trade, and his precision investing in S&P 500 option LEAPS. His book, The Alpha Hunter, is set to be released by McGraw Hill in December 2009.