The attention span of the trading community is comically short. AAPL & FB is now all the rage, with hardly a soul in sight mentioning GOOG or AMZN. TSLA has slowly leaked lower since earnings, so commentary has shifted to discussing NFLX and LNKD. Sector cheerleaders have changed their focus to technology (which was a major underperformer in the first half of 2013), and financials are barely discussed, as they’ve ticked lower in the past couple weeks.
As Dan mentioned in the Morning Word, the renewed focus on AAPL will likely continue until the product announcements in September, after which the merits of the stock will rest much more on the consumer’s reaction to those products than the recent financial engineering. Until then though, we expect a lot of the large-cap tech money that left AAPL for dead in the past year to be forced to rotate back into AAPL, likely at the expense of former tech growth darlings GOOG and AMZN. It’s basically offsides positioning to a large degree. The 1 year chart of AAPL vs. GOOG shows that rotation:[caption id="attachment_29246" align="alignnone" width="625"] 1 year chart of AAPL (red) vs. GOOG (blue), Courtesy of Bloomberg[/caption]
While we don’t like AMZN either, we’re more focused on GOOG because it’s the larger name and has been a bigger beneficiary of AAPL fund flows in our view. Moreover, GOOG’s recent earnings disappointment has dampened the upside potential in the name until its next earnings release, particularly since it’s evident from Facebook’s release that GOOG is lagging in the battle for mobile advertising dollars.
GOOG is essentially flat over the past 3 months, which is slightly weak relative to the broader market, but particularly weak vs. the Nasdaq composite. The stock has cleanly broken below its 50 day moving average this week:[caption id="attachment_29248" align="alignnone" width="624"] Daily chart of GOOG, 50 day ma in pink, 200 day ma in black, Courtesy of Bloomberg[/caption]
The key support level on the downside is around $845, which was the high from March that served as support in June. The 200 day moving average is still not really in play, all the way down around $800.
In this context, we like the idea of playing for a move down to the $845 level as the rotation back into AAPL takes place BUT we want to do this on the first bounce, the stock is down 6% from the all time highs made in July, and down 4% from Aug 5th. Entering a new short at this moment would be a bit of press, want to see if It can attempt a bounce back towards its 50 day moving average ~890.
Gun to our heads this is the trade that we do now, but we are trying to be a bit patient:
TRADE: Buy GOOG ($872.50) Sept 6th Expiration 880 / 850 / 820 Put Fly for 8.00
-Buyt 1 Sept 6th 880 Put for 20.30
-Sell 2 Sept 6th 850 Puts at 7.30 each or 14.60 total
-Buy 1 Sept 6th 820 Put for 2.30
Break-Even on Sept 6th Expiration:
-Profits of up to 22 btwn 872 and 822 with max gain of 22 at 850
-Losses of up to 8 btwn 828 and 820 and btwn 872 and 880, with max loss of 8 below 820 and above 880.
Trade Rationale: GOOG has been an out-performer all year despite the backdrop of a series of earnings misses. It is our view that GOOG has been the massive beneficiary from the lack of places to put money in search of growth in large cap tech. With attention now back on AAPL and FB, we think we could see GOOG underperform into the balance of the year. But in the near term we like playing for outflows in GOOG and inflows into AAPL’s expected product announcement on Sept 10th.