All Eyes on Apple


JANUARY 26, 2016

Few things are as frustrating as when well-known investment professionals act absolutely certain of a specific future outcome. It’s irresponsible as a fiduciary to one’s clients. And, just as important in our eyes, instead of trying to educate the public, it’s simply fanning the flames already burning wildly. This morning, Dennis Gartman proclaimed that “crude oil will never trade back above $44 in my lifetime.” Sure it won’t, Dennis.

Nor will Apple be able to continue its success. If you’ve been reading the press and analyst reports, it is abundantly clear that Apple’s best days are behind it. Just as the oil-trade has become almost entirely one-sided (my family and friends who tangentially follow the markets just “know” it will continue lower), so has the Apple trade. The iPhone business has peaked. The Watch is a huge disappointment. The iPad has little potential to expand. The Car is DOA.

Forget the narrative. Since when has it worked in this company’s favor anyways? The cycle has become incredibly consistent. When everyone agrees with the growth story, shares tend to top out. And when everyone agrees that the upside is limited and the company has peaked, shares tend to be in the final stage of a bottoming process.

A REPLAY OF 2013. Last week as AAPL quickly descended to re-test the August capitulation lows, we released the chart below. There are so many interesting correlations to consider.

First, for a multi-month period during 2012, shares formed a head-and-shoulders topping pattern. When it broke down from that topping pattern, it experienced a dramatic 25% drop in a short amount of time. After bottoming near long-term support (the $51-$54 range established before its huge run-up), it tested and then re-tested the 100 DMA. The week before a crucial July earnings report, shares re-tested the lows at $53, then rallied to the 20 MA level into the earnings announcement.

AAPL

Fast forward to today. We can really just cut and paste from the section above. For a multi-month period during 2015, shares formed a head-and-shoulders topping pattern. When it broke down from that topping pattern, it experienced a dramatic 25% drop in a very short timeframe. After bottoming near long-term support (near $94, the previous all-time high), it tested and then re-tested the 100 DMA. The week before a crucial January earnings report, shares retested the lows at $93, then rallied to the 20 MA level into the earnings announcement.

  • A secondary observation is that the RSI levels during the initial bottom, test of the 100 DMA, and re-test of the bottom all occurred almost precisely at the 25, 70 and 25 RSI levels.
  • A final observation is that each time over the past five years that the MACD dropped to a -4, shares of AAPL rallied between 17%-19% in just a few days. It did so again last week. That equates to $110 after earnings, which interestingly is almost exactly at the 50 MA.

The question of the quarter is, will this double bottom hold as it did in 2013? If shares do break upward after earnings, the pattern will continue to look an awful lot like July 2013 with a strong double bottom possibility. That said, a double bottom is not confirmed until/unless the $125 level is definitively broken.

FIBONACCI SUPPORT. A completely independent piece of evidence that AAPL may be bottoming is found in the Fibs (i.e. Fibonacci levels).

After the 2009 bottom, shares of AAPL climbed consistently for almost three and a half years. When shares did fall back during the 2012/2013 “Apple crash”, it found both initial support (capitulation bottom) and final support (double bottom) almost exactly at the 50% Fibonacci retracement of that entire 2009-2012 run-up. From the lows of 2013, shares of AAPL climbed for another two years. It found initial support (capitulation bottom) and a secondary support (potential double bottom) almost exactly at the 50% Fibonacci retracement of the 2013-2015 run-up.

AAPL Fib

All eyes will be on AAPL this afternoon. Don’t be surprised to see the shares become extremely volatile into the close. Notice that we have made no claims to be certain about the future price action. Based on the price action and technical evidence before us, we expect that the likelier possibility is for shares to be in the late stages of a bottoming process. But there can never be absolute certainty in the investing and trading process. A truly riskless investment does not exist in the equity markets; but by accumulating independent pieces of evidence, you can shift the odds in your favor.

FUNDAMENTALS. A quick rundown of our estimates and March guidance are below:

  • Revenues: $77.7 billion;
  • EPS: $3.37 ($9.51 LTM / 10.5x PE at the current price);
  • iPhones: 81.5 million @ $660 ASP
  • iPads: 14.5 million @ $420 ASP
  • Macs: 5.75 million @ $1,250 ASP
  • Watches: 6.5 million @ $446 ASP
  • GM: 40.0%

Guidance will be very important. The general consensus among analysts is that Apple will report at or just below its top end of guidance for the December quarter (we’re slightly above that). However, there is a considerably large range for the March quarter. We’re currently at 63.5 million iPhones, which we view as conservative representing less than 4% YOY growth, and gross revenues of $60.7 billion, less than 5% higher than the year ago quarter. If the revenue guidance mid-point is around the $57.5 billion area, our expectation will be confirmed.