Is it Time to Buy Apple Again?

Instead of becoming the first 1 trillion dollar company, Apple’s market cap shrunk by more than $200 billion. Apple today is almost 30% cheaper than it was just a couple months ago. Is now the time to buy?

28 – If you follow Apple shares you probably know what this number stands for. 28% is how much AAPL dropped from September 21 to November 16.

That’s a terrible situation if you own AAPL, but great news if you are a bargain buyer – AAPL is now almost 30% cheaper than it was 40 trading days ago. Does that mean it’s time to buy AAPL?

The answer depends on your time horizon.

AAPL Long-Term Outlook

A November 15 CNBC article titled “Apple stock hit by panic selling:  Someone yelled fire” (that’s good for the short-term, more about that below) pointed out that more than 800 hedge funds and mutual funds counted Apple among their top ten holdings at the end of the third quarter.

“Apple was the classic case of no more incremental buyers of the stocks. No matter how bullish a story, you need new buyers of the stock or it will go down.”

Well no kidding Sherlock, that information would have been useful a few weeks ago.

In a March 16 research note to subscribers on record, I published the following research:

“About one-third of all U.S. stock mutual funds own Apple. One in five hedge fund managers holds Apple amoung their 10 largest bullish positions. Only 2 of 54 analysts have a sell rating on Apple.

40 dividend focused funds own Apple. Apple is the single biggest holding of Goldman Sachs’ U.S. Equity Dividend and Premium Fund. Yet Apple has never paid a dividend. 50 small and midcap funds own Apple. Yet Apple is the largest company in the world.

If and when Apple sneezes, the market will get a cold. A 20% drop in Apple shares would zap over $100 billion of liquidity and likely increase mutual fund redemptions and emphasize the need for cash. Apple shares and other high flying stocks will have to be sold to raise cash and the market will drop further.”

The financial market was more than just saturated with Apple stock, it gorged on AAPL and I doubt that – over the long-term – a 28% drop will cure the saturation hangover.

The September 28 Profit Radar Report issued one of the most contrarian recommendations for individual stocks ever:

“Aggressive investors may short Apple (or buy puts or sell calls) above 700 or with a close below 660. Obviously, there is no short Apple ETF and if you don’t have a margin account set up, you may consider using the Short QQQ ProShares (PSQ), which aims to deliver the inverse performance of the Nasdaq-100 (Apple accounts for 20% of the Nasdaq-100).”

AAPL Short-Term Outlook

After falling as low as 506 on Friday, AAPL staged a nice reversal and closed at 527. In the process it created a green reversal candle against a small bullish RSI divergence (price made a new low, RSI did not).

A similar constellation happened on November 9, but prices continued to fall lower. The difference between Friday’s (November 16) and the November 9 green candle is volume. Friday saw the most shares change hands since March 13.

In short, AAPL is showing signs of life and prices are likely to move higher, but I think an even better opportunity lies ahead in the near future.

The Profit Radar Report analyses the markets and the forces that drive the market. Such forces include technicals, sentiment, seasonality, and recently the performance of Apple. Sunday’s report includes a multi-month forecast for the S&P 500.

What’s Killing Stocks and What May Resurrect them?

It’s better to be out of stocks wishing you were in, than in wishing you were out. But it’s best to be short stocks when stocks are down. The short trade has worked well, but how much more down side is there?

Every kid knows you better eat your ice cream before it melts. Investors should know to lock in profits before they disappear.

The recent 8.6% drop in the S&P 500 and 12.6% fall in the Nasdaq-100 has certainly done some technical damage and erased a fair amount of profits.

What has caused the market’s sell off and how much worse can it get?

There’s never just one event that triggers a market sell off, but as far as the recent sell off is concerned there’s one reason that weighs heavier than any other: Apple.

Live by the Sword, Die by the Sword

Apple had an incredible run, soaring from $80 in 2009 to $705 in September 2012. Apple became the most valuable company in the world and in the process controlled 20% of the Nasdaq-100 and 5% of the S&P 500.

Apple was like a “dictator of the financial market.” As Apple goes, so goes the market. But that relationship is a two-edged sword, because when Apple sneezes the market will get a cold.

So how was Apple’s health?

According to the Wall Street Journal, “Wall Street analysts are increasingly bullish as Apple hits fresh highs” (August 27, 2012) and MarketWatch wrote “Apple seen as trillion dollar baby” (August 21, 2012).

In contrast, the August 22 Profit Radar Report warned: “The new iPhone will hit the stores soon, a mini iPad is in the pipeline, Apple TV will be in many living rooms near you soon and the holiday season is coming up. Based on fundamentals there’s no reason Apple stock shouldn’t rally, but technicals suggest that a top may be just around the corner.”

This warning was followed up by a specific trade recommendation via the September 12 Profit Radar Report: “Aggressive investors may short Apple (or buy puts or sell calls) above 700 or with a close below 660. Obviously, there is no short Apple ETF and if you don’t have a margin account set up, you may consider using the Short QQQ ProShares (PSQ), which aims to deliver the inverse performance of the Nasdaq-100 (Apple accounts for 20% of the Nasdaq-100).”

Apple has fallen over 25% from its September high and dragged every major U.S. index with it. If you’re looking for a scapegoat, look no further than Apple.

How Low Can Stocks Go?

The S&P started to tread on “thin ice” in late October. Why thin ice? Because it was trading perilously close to key support around 1,400 (see trend lines in the chart below). The thin ice finally broke when the S&P fell through key support at 1,396.

A break of key support is generally a precursor of lower prices, that’s why the November 7 Profit Radar Report stated that: “A move below 1,396 will be a signal to go short with a stop-loss around 1,405.”

The chart below was originally published in Sunday’s (Nov. 11) Profit Radar Report, which included the forecast for the week ahead. Below are a few excerpts from Sunday’s PRR.

“We are short with the S&P’s drop below 1,396. How low can stocks go?

The chart below shows two important levels: 1,371 and 1,346 (updated chart shown below).

Since there’s a good chance of an extended down move, I’m inclined to just let our short position run and see where it takes us. 1,371 is the first hurdle to be overcome to look lower.”

The S&P sliced through 1,371 on Wednesday, and Friday’s trade drew prices as low as 1,343. Since our weekly target has been met we’ve sold half of our short positions.

This doesn’t preclude lower prices, but a bounce is possible and it’s smart money management to eat your ice cream before it melts, or take some profits before they disappear. Continuous target prices and buy/sell levels will be provided by the Profit Radar Report.