Apple – Does This Signal Indicate a Reversal?

Malcolm is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I know it is a logical tautology to say that Apple (NASDAQ: AAPL)  moves with the Dow, except when it does not. But I actually mean something here. If you look at Apple’s chart over a long time, you can see that it typically moves more or less with the Dow, although often multiplying the Dow’s moves. It is really striking to look at the chart and see how similar the ups and downs are. (I pick the Dowsince Apple will influence the NASDAQ since it is such a large component.)

Look at June 27 to July 19 (chart 1), for example. Both lines are at a small top, drop slightly, then rise and dip and rise in almost perfect unison, although Apple exaggerates the moves.

 

<img src="/media/images/user_13421/apple_chart_reversal-01_1_large.png" />

Chart 1 (Yahoo Finance)

Except when it does not. So Apple will follow the Dow for a period of time until it decides it will make its own move – usually upward. These are when it moves up to a much higher level – kind of quantum jumps. This follows a different pattern. Apple move strongly higher over a period of time, independent of the Dow.

<img src="/media/images/user_13421/apple_chart_reversal-02_large.png" />
 

Chart 2 – (Yahoo Finance) AAPL vs. DOW: 20 Dec., 2011 to 19 Mar. 2012

In chart 2, the Dow rises steadily to up 9%, but Apple charges up, no longer mimicking all the dips, to a 51% gain.

Chart 3 illustrates the first pattern of a sharp move down, but still mimicking the Dow in exaggerated form. In particular, it rose with the Dow (including a slight dip) from Nov. 16 to Nov. 23.

 

<img src="/media/images/user_13421/apple_chart_reversal-03_large.png" />

Chart 3 – (Yahoo Finance) AAPL vs. DOW: 3 Oct., 2012 to 26 Nov., 2012

 

Until Monday –

Apple took its departure, moving up strongly on a significantly down day for the DOW. Apple closed up over 3% ($589.48) on strong volume, while the DOW was down 0.33% - fairly strong for that index.

This is a significant move. With Apple down sharply from its high in September of just over $700, (see “Apple Physics: What goes down, must go up”), and analysts predicting an average target of $760 and as high as $1,111, the question is this:

  • Is this beginning of another great runup?

Another way to put it might be:

  • Is this the last chance at a great bargain?

Analysis

Patterns such as these aren't simply random. They repeat for a purpose. Just as an individual has many habits, so the market has habitual patterns, but they do not exist in isolation; they say something about market sentiment.

There is the adage “Buy the rumor – sell the news.” Market buyers often buy in anticipation, but once the news is announced, it is too late, and time to leave. Yet if a company is doing well, then this will be followed by a resurgence. People get so used to a dip after the news, that they sell automatically without thinking of further down the line.

This appears to be happening in this case. But it is magnified by several other coincidental forces.

To begin with, we had the announcement of the new iPad Mini. Apple shares made a large run upward preceding its arrival, and shares peaked at $705 just before its announcement. Crossing a $100 multiple is typically a bit dicey, it's not surprising that investors pulled back. At the same time, however, the market did not like the price of the Mini (starting at $329). This put a real negative spin on the day. In the following days, a series of news reports came in regarding many issues including supply constraints on both the iPhone and iPad Mini.

But Apple was not alone with bad news. The whole market took a beating with negative news on Europe, Invasion of Gaza, US economic woes, and the Fiscal Cliff. With negativity on Apple magnified by a dour mood overall, Apple took a real tailspin.

But most of that was all for naught. While Greece is still in crisis, it looks as though the situation is resolving itself, at least temporarily. The fiscal cliff still looms, but some recent economic reports (housing, consumer confidence) have ticked up dramatically.

Finally, it is looking pretty likely that the long term capital gains tax will revert to 20% next year, so many people are taking profits to catch at the lower rate. (See: Apple Physics - What goes down must go up.)

And so, those who wanted to take profits, or who became frightened of the $700 price, bailed out. AND…

  • Now that they are out, the buyers will take over

This is what produces the dip and rise pattern that is so often seen. The pattern is not a thing of itself, but a reflection of market sentiment.

One more thing…

And finally, the news on Apple has also turned. (See iPhone back on top). This will be the fuel to launch the next rise.

Conclusion

Reports are that Apple sales in the Post Thanksgiving days have been very strong.

  • Abhey Lamba, Mizuho Securities: “Our checks indicated that there was significant supply of iPhone 5s during the weekend and Apple has worked hard to improve the supply situation of its flagship phone,” he writes. “We continue to believe that Apple will deliver over 50 million iPhones during the quarter with consensus being in the high 40s. In our view, the recent pullback in Apple’s stock has created a buying opportunity as upside to shipment estimates will drive margin and earnings outperformance, which should help move the stock higher.” [italics added]
In another Forbes post, author Savitz quotes UBS analyst Steve Milunovich:
"Finally, we see a similar price pattern that has played out in other iPhone cycles, in which the stock corrects after introduction then rallies.”

A rise from $589 to $760 would be almost 30%.

And this price ($760) is before the analysts do their regular raise-price-target-just-before-earnings-report routine.

So one can take advantage of this pattern and look out for it again next time.

=====

Malcolm Manness has a Masters degree in Computer Science, and worked for 14 years in development, technical publications and software quality assurance. He has been investing for 20 years. Currently, he does writing, and FileMaker Pro programming on contract.

His short fiction can be found (under pseudonym J. Seunnasepp) at http://50centflash.com/.

 

==== Understanding Apple series

You may love Apple and their products, or hate them to the core, but you cannot deny that Apple now has the highest market cap of any company, their products are trend setters, and currently they are trading at rather low multiples, especially regarding forward earnings.

Warren Buffet has the maxim: “Invest in what you know!” So, for those who want a unique perspective on Apple’s success, I have a series of articles Understanding Apple. I hope you will find them helpful and provocative.

Let me know what you think.

Previous Article: Enterprise Facebook - Rats Deserting a Sinking Ship?.

 


JaanS owns shares of Apple. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus