The S&P 500 ended in the green yesterday as traders anticipate an imminent Greek deal even though the two sides continue to wrangle. This half-full outlook is a material departure from recent crises. Previously the market would devolve into a downward spiral of emotional selling over any headline uncertainty. Greece part 1, 2, and 3. Fiscal Cliffs. Sequester. Taper. Etc. But not this time. Hindsight being 20/20, we know those emotional sell-offs were great buying opportunities. It seems traders finally picked up on that trend and are no longer interested in selling the dip for Greece part 4. While that was the right call those other times, is it the right call here?
The reason those other dips were buyable is because the emotional selling priced in the worst-case outcome. When reality turned out less bad than feared, we rallied in relief. But that is clearly not happening here as we rest less than 10-points from all-time highs while the Greek posturing and grandstanding drags on. Clearly this is anything but pricing in the worst-case outcome. What happens if the market assumes a rosy outcome and things turn out less well than expected?
While the market will likely be right this time, sellers are not offering steep discounts to own this risk ahead of a signed deal. That means two things. First, if prices are not repressed, then there is less upside when things turn out okay. Second, what if the market gets this wrong? Limited upside and plenty of downside? Not a trade I want to make and it is best to let other people own this optimism. The more interesting trade will be if this turns into a buy-the-rumor, sell-the-news. Something to watch for in coming days.
Individual Stocks:
AAPL – Apple (NASDAQ:AAPL) continues to be fairly unimpressive. No reason to sell it, but no reason to buy it either. The big headline is management caved to Taylor Swift’s demand that they pay artists during Apple Music’s free trial. While that will cut into earnings by some token amount, the free publicity this generates will more than make up for it. While this will build extra awareness for the streaming product, competing with Spotify is a much higher hurdle than Apple’s failed attempt to dethrone Pandora with Apple Radio. People didn’t change from Pandora and they won’t switch from Spotify. We can give Apple credit for trying, but this clearly isn’t the innovation shareholders are hoping for.
ALGN – Align Technology (NASDAQ:ALGN) continues to show strength following last week’s dramatic test of support. This is the fourth day the stock held well above $60 support and this is telling us buyers, not sellers are in control. Wednesday’s emotional selloff actually built a bullish setup because it chased off many of the timid owners with tight stops. Anyone still in this name demonstrated that their finger is not anywhere near the sell button.
EBAY – eBay(NASDAQ:EBAY) is recovering nicely from its test of $60 support. What was previously resistance is now a buying level for larger investors that want to accumulate this stock ahead of the PayPal spinoff. Another example of patience and discipline paying off.
FEYE – On the other side of the coin, FireEye (NASDAQ:FEYE) touched $55 last week, but is down two-and-a-half dollars since then. Those that were riding the easy money wave higher hit a speed bump. There is nothing wrong with the stock or the story, but common sense tells us it is unreasonable to expect a stock to go up day after day. Last week I suggested we were approaching a good time to lock-in some profits and buy back in a little lower. We stalled at $55, now we get to see if the pullback slips under $50 support before bouncing. The great thing about those that locked in profits is it doesn’t matter to them if we find support or not since they are watching this weakness from the sidelines.