February 1, 2013 (7:00 pm)
Apple has not been getting much love recently. That is, of course, an extreme understatement. The stock is down over 13% since its mid-November lows, while the SPY is up almost 13% over the same period. The bulls are simply exhausted, after giving up almost 40% (and a year’s worth of gains) in just four months. The bears have made their money and are moving on. Even CNBC has moved on, which in and of itself is a dramatic development. But moving on right now could be a mistake. For investors that are licking their wounds, as we are, it may look like all is lost. But Apple is one of those names that enjoys being stealthy. Not just the company and its management team, but also the stock. So what now?
Looking back at where we were sitting four years could shed some light on the likely direction of the shares over the coming months.
From July 2006 though January 2008, the shares soared from $60 (A) to $200 (B). Over the subsequent six months, the shares fell to $125 (C) before rallying back to the highs (D). Then the unthinkable happened. The shares plummeted to $80 (E), a move that nearly doubled its previous move down. Does that sound familiar?
Fast forward to 2012. From January through April, the shares soared from $400 (A) to $644 (B). Over the subsequent two months, the shares fell to $520 (C) before rallying back to the highs (D). Then the unthinkable happened. The shares plummeted to $440 (E), a move that nearly doubled its previous move down.
As you probably noticed, we used the exact same language for both cases, only replacing the relevant prices. In each case, the second correction (D-E) was twice the size of the first (B-C).
An important take away is this. Apple tends to do very well in two environment’s. One is when people aren’t looking. When shares have tanked, and it just becomes known as “another stock,” as Jim Cramer proclaimed. The other is when people simply believe it can’t continue up, like when it tripled over the course of 18 months in 2006/2007 and rose $250 points to start 2012.
We may see the shares slip sideways for the next few weeks, or even the next couple of months. That should not surprise anybody. Look at the consolidation between October 2008 and April 2009 (however, don’t forget that was in the midst of the financial crisis). The current consolidation period will likely be much shorter. Why? Because the entire pattern is compressed compared to the 2006-2009 price action. While the first took 30 months to play out, the current case unfolded in only twelve. We are very likely at or near the low’s. Based on historical precedent, betting against Apple down here is not a prudent move. Tim Cook said so himself (twice) during his Rock Center interview. “Don’t bet against us.” We agree.