I think that it will turn out that last week could prove to be a watershed for financial markets. The Fed was always going to have great difficulty in digging itself out of the QE hole that it has managed to lodge itself in. However serious questions also remain about the role of the media in all this. Just what is the point of the Fed-inspired ‘guidance’?
In Thursday’s blog I paraphrased Churchill, but today I am reminded of one of Abraham Lincoln’s most famous quotes. “With tapering, everyone was fooled, only one at a time, but on one of the most important occasions”.
I can only presume that there has not been a follow through move to the upside in US stocks, because the market is genuinely confused as to what the Federal Reserve is going to do next. Even worse, the penny finally seems to be dropping that Bernanke and his cohorts don’t appear to know what they are doing!
The majority/consensus/conventional wisdom (take your pick!) can get it wrong about stocks and markets in general. When it does, the results can be spectacular. When gold was approaching $2,000/oz in 2011, I do not recall anyone warning that the market was overcooked and the next major move would be to the downside (with the exception of us – see below from last year). You could probably count on the fingers of one hand the number of people who predicted a fall to $1,200/oz within 2 years.
One of the more high profile examples past of the collective apparently getting it wrong in the recent concerned with social media group Facebook (NASDAQ:FB).
In fact, there is even an argument that the market got Facebook wrong twice!
When Facebook made its debut, the rush to join its IPO saw its initial price marked up far too highly. Then there was the overshoot below $20 and the apparently ridiculous P/E ratio of 50 suggested an implied valuation well below $10. The more recent turnaround, driven by the potential for mobile revenues, has arguably been the most painful squeeze of the lot.
Now, it looks like there is further potential upside to the stock, which finds itself in a rising channel, which started at the beginning of July. The implied upside is $50 plus. This target could even be reached by the end of October. The fact that the move to the upside is backed by an unfilled gap to the upside of July as well as August’s golden cross (a strong buy signal), suggests that the recovery is here to stay.
Another painful “wrongfooting” for the consensus this summer has been the topping out of Apple (NASDAQ:AAPL).
This was an event I anticipated in my book “Lessons from the financial markets for 2013”. The tumble in value of the maker of iPhones was interpreted as the end of one year of mourning for the legendary Steve Jobs, as well the honeymoon period for his successor.
Today we are in a difficult spot as far as AAPL is concerned. The questions is, to quote the rhyme from the “Grand Old Duke of Uork” – are we half way up or half way down?!
For me, the sensible play is to sit and wait until a clear charting signal emerges. The closest we have to this, at the moment, is the narrow bear trap from just below the 200MA at $459. While the ideal scenario would be to wait on a break back above this month’s down gap top at $489, we do at least have the beginnings of a higher low buying opportunity, certainly while this week’s $447.50 floor remains in place. It will be interesting to see how yesterday’s retail launches of iPhone 5C and 5S affects this.