Widow's mite

The conversation yesterday re my short term concerns for the market and the potential long term opportunity for Apple Computer/AAPL ended up disturbing me. I think I write with clarity but I must re-assess both my message and how I convey it, if two long-time readers misunderstand me.

Most investors get into trouble for various reasons; among these is their perception of the market as a Boolean logic gate -- black or white, all or nothing, in or out. I instead perceive the market, and my portfolios, as a continuum. Thus I rarely if ever make an overarching single decision. I phase in to or out of positions. I lot swap(TM). I align my portfolio holdings with my expectations for the market in the time frame critical to me. And finally, I buy the leaders -- the leaders in the company's industry or sector, and the leaders in the market.

What traits to leaders manifest? When the market declines, they decline begrudingly (relatively less than the market) if at all. When the market advances, they advance with alacrity (relatively more than the market). Sometimes they advance while the market declines. These attributes can be viewed in part in the chart action below. You will note that the NASDAQ Composite and Apple Computer/AAPL mostly tracked each other... If the market rallied, so did AAPL. If the market declined, so did AAPL. Until, that is, August 2004. It was then that Apple/AAPL exerted itself, and became stronger than the market, transmuting itself from yet another coeval to a market leader.

[click to enlarge]

Point 1 indicates (approximately) that moment of exertion. Direction 2 shows the sideways action of the market while Apple/AAPL exploded upwards in price (direction 3).

One investing decision I made affirmatively long ago is to seek and then buy only from among the market's leaders. This means that, once identified and purchased, I trade the trading lots not the investment lots. This is another area in which most investors have difficulty, as they sweep into and out of their investment holdings. This all or nothing approach confuses more than it helps, because it places an undue reliance on the investor's self-perception as perfection personified.

As it happens, I own both lots of Apple Computer/AAPL -- the investment and trading lot. I have yet to trade it because it is unlikely to decline to or beneath my acquisition cost for either lot. Upon the upside breakout (should it occur), it is likely I will purchase a third lot, and then I will trade that third lot. If my concerns re the short term direction for the market prove correct ("shallow and brief") then the market's leaders, such as Apple/AAPL, should merely continue their basing action, perhaps even break out as Apple/AAPL now threatens to do.

But that is precisely how leaders manifest their leadership -- they rally before the market does; in fact, it is their positive action that stems the decline and creates the turn in the markets in general.

If your strategy is to trade a range, then $45-35 has been a particularly good and probably profitable one for you. If, however, your strategy is similar to mine -- use the trading range to accumulate your position and better your cost basis, and then hold on for the upside trend -- why sell? This pattern, and others like it, are nowhere near the completion of their ultimate move. Despite what might occur in the markets in general.

Capice?