Yearend Play in APOL

It's a tough quarter ahead, but APOL makes a good yearend play as tax-loss selling is complete

   

 

jmta 12172012 compq 300x185 Yearend Play in APOL
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From a technical standpoint, the most interesting development yesterday was that the Nasdaq Composite rose above its 50-day and 200-day averages at the same time. This happened last week too, so you might think it is a fairly common occurrence. However, it has only happened six times since 1971, according to analysts at Bespoke Investment Group.

So is it bullish? Not really. In fact, the analysts looked at one month, three month and six month returns after past crosses and the results were pretty blah – a 1% average gain in the three month period and 7% over six months, which was OK but nothing to write home about.

This is probably because when the 50-day and 200-day averages are so close together that they can be crossed on one leap, the market is in a state of indecision and neutrality. And apparently it tends to continue in that state for a while. That is not terribly surprising.  In other words, we are not talking about a moment when the market has reached an extreme. The market is flattish during these crossings so there is not a lot of kinetic energy stored up that needs to be released in one direction.

In summary, it was great to see the market trade higher yesterday and it shows what could happen if a fiscal cliff deal were actually finalized. But it’s doubtful that this was the last word. Stocks are likely to be stuck in a trading range while the politicians keep talking.

Meanwhile, we are looking at a first quarter straight ahead that could be quite difficult for a lot of companies. In a sense, the uncertainty bred by the political negotiations has already affected corporate executives’ behavior, as they have said they are cutting back on investments until they have greater certainty about the new tax regime.  Likewise, individuals are holding back from consumption during this holiday season as they face the possibility of having a huge chunk of their paychecks removed come January, should the Bush era tax cuts not be continued.

These decisions are already being “baked in the cake” for fourth quarter earnings that will be announced in January. I expect a fairly rocky start to the year although I hope to be proven wrong.  Either way we will find ways to make money in stocks and options.

Recommendation

Apollo Group (NASDAQ:APOL) is a private, independent education company that has been rocked by a variety of negative factors this year. All the troubles slammed the stock down to $18 from the $57.50 at which it traded at the start of the year.

My model suggests APOL is sold out at this point. This is the kind of stock that makes a good play at the end of the year as tax-loss selling is complete. This tends to leave a vacuum that allows a stock to levitate simply because there are only value buyers left.

APOL rose as much as 2% yesterday but slipped back near the close to log a 0.4% gain.  I’d recommend the APOL Jan. $21 calls. These expire on Jan. 18. Hold for a target of $2.40.

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