March 1, 2016
We expect Apple to report the first decrease in LTM (prior four quarters) EPS for the March quarter since the middle of 2013. The last time EPS saw a decline, shares priced in that decline roughly six months beforehand; likewise, just about six months before it reported a return to earnings growth, shares began to rally.
We saw the same thing this time around. Share price peaked in April, several months before it became clear that the holiday 2015 numbers would not be as stellar as anticipated. Now the big question is when will Apple return to earnings growth? We expect the June quarter to begin that trend, followed by significant jumps in EPS during the September 2016 and March 2017 quarters. If that’s the case, investors should begin to reprice shares over the coming weeks.
Additionally, shares of Apple have respected one of the most important technical indicators out there. The Fibonacci levels are crucial here. During the 2012 “crash” in Apple stock, the shares respected and held the 50% Fibonacci retracement level (measuring the beginning of the rally in 2009 to the Sept 2012 top). Likewise, Apple has held that 50% retracement level from the 2013 trough to the April 2015 highs. Our thesis is that the confluence of this event in combination with the fundamental picture are aligning for a positive 2016.
Lastly, the Bollinger Bands on the daily chart are as tight as they’ve ever been (less than $5 width). This is significant, as the BBands represent not one, but two standard deviations from the 20DMA. When this happens, we tend to see an explosive move in the near-term in the magnitude of 7-10%. It’s interesting to note that AAPL is bumping right up against the 50MA right now. A break above that level, which it hasn’t traded above in almost 3 months, is likely to cause a big move.