Sentiment


Apple: A Pivotal Report

October 25, 2015

Welcome back, folks! Over the past three months, we’ve spent most of our time analyzing the Apple technicals on Twitter (you can follow our feed on the right sidebar of this page). With Apple releasing its fiscal 4Q 2015 earnings – and even more importantly guidance for the holiday quarter – on Tuesday, we wanted to prepare an update on our expectations. We will review both the fundamentals as well as the technicals, and our thoughts heading into the report.

FISCAL 4Q 2015 EXPECTATIONS.

AAPL 4Q15

So let’s look at this by category:

  • iPhone unit shipments tend to be slightly higher during 4Q than the prior quarter. This is largely driven by the introduction of the new devices in late September each year. While the prior (n-1) devices fall off a bit going into the release of the new devices, that dynamic is more than made up for by the annual surge at the end of the quarter. Based on the trend analysis we’ve conducted looking at the year-over-year (and quarter-over-quarter) growth in unit shipments, we’re adding 2 million units compared to last quarter and 10 million compared to last year. While it’s a big jump over last year on an absolute basis, the percentage growth is in-line with what we’ve witnessed in the past. Additionally, the move to a larger form factor is driving some additional growth in the 6-series devices. On a pricing basis, we’re projecting an ASP of $655. This equates to a $5 decline over last quarter and a $50 decline over last year. This is in-line with the 4S and 5S models, as a larger percentage of users purchase the n-1 device (i.e. the 6, not the 6s).
  • Mac unit sales will likely come in at 5.8 million units. This category continues to see growth, but is well-established at this point and easier to forecast than the iPhone and iPad categories which have seen varied growth rates over the past few years. Over the past four years, it has seen growth ranging from 22-25% over the prior quarter. That is a very tight and well-defined range. We are projecting growth of 21%, equating to 1 million more units than last quarter. Similarly, Macs tend to experience a $50 decrease in ASP between the third and fourth fiscal quarters. We are projecting a similar decline to $1,200 ASP.
  • iPad will likely see a further decline in unit sales. The holding period of these devices is far longer than we would have expected. We’re projected 9.5 million units were sold in 4Q, down 1.5 million from the prior quarter. We’re also estimating a minor decrease in ASP to $410.
  • Apple Watch has seen an enormous shift in sentiment over the past few months. The initial huge expectations has turned into almost an afterthought. We were surprised to see some of the extremely low numbers that others are projecting. We are projecting respectable growth from 2.6 million units sold last quarter (our own estimate, since Apple doesn’t disclose this) to 4.5 million units in 4Q. Tim Cook stated that there will be more Watches sold this quarter than last, and even more during the holiday quarter. Some took that to be his way of lowering expectations. In our view, he was simply stating the obvious. With the additional data point of both Best Buy and Target fast-tracking sales into as many stores as possible, it’s clear that these things are selling.
  • REVENUE. We are projecting $52.1 billion in revenues, which is 4% above their guidance. This would be the second lowest beat against their guidance over the past two years. We tend to have a conservative bias in our numbers, so feel good that our numbers are not only likely, but that there is more room to the upside than the downside.
  • EPS of $1.98 that we are projecting is $0.10 higher than consensus. The fact that we believe the risk to the upside is higher than the downside risk makes us comfortable that Apple will in all likelihood beat consensus for 4Q 2015.

FISCAL 1Q 2016 EXPECTATIONS.

Importantly, there is much more to the story than simply performing well last quarter. The guidance for the holiday quarter will drive the post-earnings reaction. During last year’s holiday quarter (1Q 2015), Apple experienced a huge beat vs. consensus, whisper numbers and even their own guidance. While they typically beat their own guidance by 4-7%, last year they beat their guidance by almost 15%. That has caused many to theorize that they simply “pulled” future demand into that quarter due to the spike in interest for the larger screen.

It’s a similar dynamic to what happened with the 5s device. After selling 10 million more iPhone 5 units in the holiday quarter than the prior year (4s), the transition to the 5s device only saw a 3 million increase. Share price started to decline in September 2012 in anticipation of these very challenging year-over-year comps. The fear at this juncture in the current environment is that we will see the same dynamic with the 6s device. Apple was able to sell 25 million more units in 1Q 2015 (74.5 million units) than they were able to in 1Q 2014 (51.0 million units)). No way Apple could beat a comp like that, right?

AAPL 1Q16

So why do we disagree with the general consensus?

We are projecting $80.1 billion in revenues and $3.56 EPS for the holiday quarter, based largely on the sale of 82.5 million iPhone units. There are a few dynamics we need to keep in mind here. Let’s first look at this from a “top down” approach, instead of a “ground up” approach.

Apple has never guided to a lower revenue number on an annual basis. Even in the weakest of their quarters, which preceded (and likely caused) the crash in late 2012, the still guided nearly $2 billion higher than the prior year actual revenues. They’ve been able to do this as the markets the products are available within and their market share continues to grow. Tim has continued to set expectations at a high level and has even gone so far as to send a letter to Jim Cramer explaining that growth in China continues to be robust. We do not believe he would be sending these signals had he expected growth to stop this quarter. Therefore, until proven otherwise, we have to assume that the historical dynamics will remain unchanged and that Apple will guide to a higher revenue number than last year ($74.6 billion). Furthermore, since Apple historically beats by 4-7% compared to their guidance, we know that they will not set themselves up to fail. In all of the quarters in which they’ve issued guidance going back to 2008, they have never come in lower than their guidance.

When you take all this together, it implies that current estimates for the quarter are simply too low. If they guide to a mid-point of $76 billion in revenues (just 2% above last year’s actuals), that sets them up for an $80 billion quarter. That’s just about exactly the figure we achieved when undertaking our “ground up” analysis above – by projecting unit sales and ASP for each category. It always gives us more comfort when multiple analyses line-up and point to a certain outcome.

TECHNICALS. Now for the fun stuff 🙂

Downtrend & Fib Levels. As soon as AAPL broke through the downtrend line from July earnings through early last week, shares surged. Significantly, not only did it break through every significant Fibonacci level, but it broke above the strong resistance level at $117.50 like it was nothing and closed above the $118.50 resistance level (dotted black line). You can also see the blue descending channel that looks suspiciously like an inverse head and shoulders pattern that has broken to the upside…

AAPL Hourly

Inverse Head & Shoulders. Speaking of the H&S bottom, see below. That’s almost as clear-cut as it gets. Don’t focus on the exact price of the shoulders. The premise is this. Shares form a new low price (left shoulder), then bounce to create a neckline. The bulls fail, and shares fall to a new low.  But the share price is able to recover to the same neckline area as the first bounce. On a subsequent drop, the bears fail and create a higher low – thus ending the downtrend (defined as creating lower lows and lower highs). Once the bulls are able to take price above the neckline, it’s a signal that a new uptrend is in effect (since there is a higher low and a new higher high). That is exactly what we’ve seen here. But we also have the important signals of RSI breaking through a nine-month downtrend (red dotted line up top) as well as a bullish MACD cross. We will be much more comfortable with the pattern if it’s able to break above the 200dma.

AAPL IHS

Bullish MACD Crossover. On the chart below, you’ll notice that we’ve seen a bullish MACD cross (green dotted lines) just prior to the four previous earnings announcements (black vertical lines). Two of these have preceded strong rallies, and two have preceded pullbacks. What’s interesting to note is that the two failed MACD crosses happened while price tested all-time highs on weakening RSI. That is no longer the case.

AAPL Daily Earnings MACD

Longer-Term RSI. While we’re on the topic of RSI, let’s look at a longer-term chart. There’s a curious recurrence taking place in the chart below. Each time the weekly RSI gets to a severely oversold level (i.e. deep into the red highlighted area) the shares have rallied to hit at least the top Bollinger Band, if not the 125% BBand level, within roughly 6 weeks. That equates to the $131-$138 level based on the current BBands, but remember the top Band will continue to rise with price.

AAPL Weekly EMA

Additionally, notice the 25 weekly ema on the chart above. It tends to act as solid support during uptrends, and marks a significant caution point when breached to the downside. However, each time shares have punctured back above this level, it has seen a significant rally.

25 Weekly EMA. Here’s a closer look at that 25 weekly ema. You can see the significance of this level. It’s also interesting to note that each time the EMA flattens, it tends to signal an inflection point in price. We just saw it turn back up slightly, which may indicate that shares are ready to resume their uptrend.

AAPL EMA Inflection

Daily Bollinger Bands. A very important piece of the puzzle is the BBands. This is a cautionary note heading into earnings. At the bottom of the chart below, we’ve included the %BB, which measures where against the Bollinger Bands that price is trading. We’ve provided colored circles for where shares sit along the BBands heading into earnings (red = top, green = bottom, grey = middle). Since the BBands measure standard deviation from the 20dma, it should be no surprise that shares tend to revert toward the mean. Historically, over the past three years, when shares are sitting at the bottom BBand (green), they rally after earnings; when sitting at the top (red), they either consolidate in the best case, or decline. It’s important to note that shares sat at the top of the BBands heading into both 2Q15 (April) and 3Q15 (July) earnings, and we saw a decline on both occasions. It’s important to keep this indicator in mind.

AAPL Earnings BBand

Bollinger Bands Over a Longer-Term. However, before thinking that we’ve turned into a raging bear, we’ve analyzed how share price tends to react to hitting the top of the BBands (100% BB). Interestingly enough, there is zero trend here. Out of the 24 occasions we measured below, 12 marked the top, and 12 marked either near-term consolidation, or a continued rally. The other aspect to note is that when shares did, in fact, continue rallying, the RSI leaped to the 80-90 level.

AAPL Daily BBands

CONCLUSION. Guidance will be critical here. We mentioned the BBands only because they were an important aspect to the prior two earnings announcements. We observed it both times but did not factor it into our investment decision. Based on all of the charts and fundamental factors, what we’re currently expecting is this. Apple will beat estimates in Q4 and issue guidance that implies an $80 billion quarter may be at hand. But we will not see a spike in after hours trading as we did for GOOG, MSFT, AMZN. Instead, we will see a more muted move over the next few days, followed by a rally to new highs as we enter the holiday season. We will be watching closely for clues over the next two days and re-assess as we head into the big announcement.


Thinking About Risk / Reward

March 14, 2015

“Every once in a while go to cash, take a break; don’t try to play the market all the time.” – Jesse Livermore. Deciding not to trade is sometimes the best decision a trader can make. That’s especially true after a string of winning trades, at the point when our ego’s grow and we think we’re better than we really are.

For the last three weeks, we’ve largely been sitting on our hands. As we detailed via our blog posts ($AAPL in 2015) and twitter, we allocated significant capital to AAPL positions in the $106-$109 range in mid-January. We sold those positions four weeks later in the $128.60 – $129.40 range for a variety of reasons, detailed in our post.

AAPL

As you can see in the annotated chart above, we didn’t catch the exact top – we were $3 short. Similarly in late November, we exited at $116 after a significant rally from our $102 entry. That was, again, $3-$4 below the top tick. What do these have in common?

In both cases, we entered the positions as the risk/reward was skewed strongly towards “reward”. The downside risk was significantly lower than the upside risk (of course we had stops in case we were wrong). But as shares reached our target price, the risk/reward was no longer skewed toward “reward”. At that point, it was at best a 50/50 trade. And why participate in a trade or investment that is a 50/50 venture? We want the odds to be skewed in our favor. And we’ve learned that the next low-risk entry is always just a few days or a few weeks ahead.

There are two ways to react to price hitting your target. Either (a) exit the position, or (b) continue raising your trailing stop until the position is stopped out. We took the former approach with these trades. And interestingly, we took a lot of flak for selling when we did. There were a number of surprised and sometimes angry messages when we closed our positions. “How could you exit here?? The rally is just beginning!”

What the people making those comments fail to understand is that we don’t care if we miss out on part of the rally and the stock continues to run higher. In our eyes, the meat of the rally had already taken place. We almost doubled the value of our portfolio with the one-month Apple trade and have been sitting primarily in cash for the past three weeks. We can’t say we’ve totally resisted taking some small trades; but for better or worse, we’ve been stopped out of almost all of them with small losses.

It has proven to be a very good time to be sitting in cash (as long as it’s US dollar-denominated!). Not only have the equity markets stalled over the past two weeks, but the dollar has been raging higher at the expense of almost all other currencies. Turns out that our “investment” in the US dollar has been a solid store of value, as our purchasing power continues to increase as the dollar increases in value and stocks continue to pull back. But as always, we’re on the lookout for the next low risk / high reward entry opportunity.


Two Minute Drill

February 10, 2015

Want to quickly run through some charts we’re watching, many of which are actionable. In no particular order…

SPY (S&P500). After six weeks of consolidation between $199-$206, it is beginning to feel like the bulls are taking control. In this market, we often see an initial false move (either a false breakdown or breakout). But two false moves is less rationale. That’s because a false move is essentially an accumulation strategy by large investors. It allows them to sweep the stops that are in place. For instance, if they want to accumulate longs, they shake out traders who have sell stops in below the current range (i.e. the $198 level on Feb 1). What we labeled as “False Breakout” on February 6 was, instead, more likely an indication of the true move. We’re seeing follow through now.

SPY

SPY (S&P500 #2). Additionally, if you look at the daily SPY chart below, it’s clear that the bulls have actually been in control during this entire consolidation. It hasn’t felt like it… but price has remained above the 38.2% Fibonacci retacement level from the October lows to the December highs. That retracement level also happened to rest at the rising channel support level (funny how technicals tend to converge at certain support/resistance levels). Further, price finally broke above – and re-tested – the January downtrend line. Things seem to be turning around.

SPY2

AAPL (Apple). As we detailed in our AAPL post yesterday, shares formed a relatively well-defined cup and handle pattern. Today, shares broke through and powered higher. Remember that shares may always re-test a significant support/resistance level. We wouldn’t be surprised to see shares revisit the $120 level and bounce higher. But we do expect that shares will be significantly higher in the coming weeks and 2-3 months.

AAPL C&H

IWC (Microcaps). The microcap index has formed a very nice inverted head and shoulders pattern. After an initial breakout that found resistance exactly at the 38.2% Fibonacci extension level, the IWC re-tested its breakout level and has largely held the $74-75 support. We do expect higher prices in the weeks and months ahead.

IWC

QQQ (Nasdaq). The QQQ’s have formed a ten week triangle consolidation pattern with very well-defined support at $99.50 and resistance found at the descending trend line. For the first time during those ten weeks, the index has peaked its head above the downtrend line. With the broader markets (SPY, IWC above) showing a bullish turn, we expect the QQQ to do the same.

QQQ

TSLA (Tesla). We’ve written detailed posts explaining our bearish sentiments on TSLA. We went short at 220 in early January and covered in the low 190’s. Instead of short and hold, we’ve been opportunistically entering quick short trades. As shares re-tested the 200MA this past week, we re-entered that position with a stop above the MA.

TSLA

TSLA (Tesla #2). Additional support for our bearish thesis is illustrated with the 40MA on the weekly chart. It’s clear that this is a significant moving average to watch – it defined the exact lows through 2013 and 2014; it also defined the exact resistance in December and again this last week. A close above this would negate our bearish thesis.

TSLA2

TWTR (Twitter). We took a small long position as shares reclaimed the 200MA the day of earnings. That was a signal that investors were showing their hand early. During the post-earnings rally, shares found resistance at the 61.8% Fibonacci retracement of the October high – December low. Today, TWTR found support at the 50% Fib level. We continue to hold our long position and will exit with a close below today’s low.

TWTR

YHOO (Yahoo). Shares of Yahoo have gotten crushed since earnings. We had expected that the 38.2% Fib level would hold, but clearly it did not. Instead, the 61.8% Fib level was tested after earnings (and has since held). Depending on your view here, it might be a decent risk/reward. With the 200MA less than 2 points below current prices, there’s a lot of support in this zone. Just remember to have stops set.

YHOO

FAS (Financial 3x Index). During the recent spike in volatility, financials were hit hard. The 3x financial bull index formed a double bottom with a neckline that sat directly at the 50MA. We love when these support/resistance levels converge, because it makes a breakout that much more meaningful. The target on this breakout just happens to coincide with the recent all-time highs at $132.50.

FAS

GM (General Motors). As we explained in a post before earnings, we entered bullish positions as shares broke above the $33.50 level. At that level, the 10, 50 and 200MA’s all converged. Clearly, a break above that level is a very meaningful. Funny how technicals often lead fundamentals. The earnings report was solid and shares spiked. We exited our position as it nears its $39 target. Might be time for a breather, but definitely not a short here.

GM

GS (Goldman Sachs). Just like the financial index above, GS formed a double bottom at $172.50 and just broke above the neckline at $182.50. However, the 50MA sits 2 points above current prices, which may be resistance. If shares do break through the 50MA, we will likely enter intermediate-term positions. But the risk/reward is simply too high until it re-takes that resistance level.

GS

GOOGL (Google). We wrote a detailed post on GOOGL and explained why shares were likely to find resistance at the $490 level. We exited two weeks later at $530 (50MA at the time). While shares did continue to the upside, we have to remember that we don’t need to catch the entire move. In fact, we should NOT try to catch the entire move. That level of greed leads to bad decisions. Know at what level it will be “enough”, that you’ll be proven right and that you’ll have a profit that you are happy with. Back to the charts… GOOGL has formed an inverted head and shoulders pattern. However, the 200MA sits just 10 points above the neckline, which makes for a tough decision. We’ll wait for the 200MA to be retaken before entering any other long positions.

GOOGL

GOOGL (Google #2). We posted the chart below as one piece of our bullish thesis on GOOGL while shares were sitting at the $490 level. It bounced off that level again. This is one to watch…

GOOGL2

NFLX (Netflix). Shares of Netflix are forming a bull pennant after skyrocketing on a nice earnings report. This one could be headed to all-time highs. RSI has backed off overbought levels, leaving additional room to the upside.

NFLX


Is Santa On His Way?

December 16, 2014

With all the pessimism over the past few days, it’s hard to see past the gloomy winter skies. But signs are starting to emerge that lead us to believe the Santa Rally is on its way… and soon.

S&P 500 (SPX) – The Wedge. We’ve been watching this chart for what seems like forever. And it’s continued to work well. The two converging trend lines are crucially important, and were only breached on one occasion (at the peak of the correction this October). Further, the 34 week moving average has been a significant support/resistance level.

SPX LT

S&P 500 (SPY) – Support. Looking more closely at the SPY, there’s strong support at the $198 level – just $1.50 below the current level. Further, the RSI is hitting oversold levels that have historically acted as solid buying opportunities. While many are worried of a straight drop similar to October 1987, the SPY created a higher high (in fact, the highest high) just last week. Before a more significant correction, all probabilities point to seeing a lower high develop, i.e. a re-test of the $206-$208 level.

SPY

VOLATILITY (VIX) – Topping Out. This chart has been a profitable one to follow. When the $VIX hits the 70 RSI level and jumps out of the top BBand, it has acted as strong support for the SPY. It is essentially signaling that capitulation is taking place and investors are dumping shares in fear of a steeper correction. Even in those instances it has “failed” (red arrows along the bottom), an investable bottom has been found within just a few SPY points. We believe the $198-$199 level will see strong support. If we do get down to that level tomorrow and the VIX continues to spike, we’ll likely be taking advantage of that early holiday gift.

VIX

TREASURIES (TLT) – Topping Out. Similar to the VIX, the treasury ETF (TLT) tends to act inversely to the equity market. As fear rises in the equity markets, investors flee to the safety of treasury bonds. The TLT has formed a really well-defined rising channel over the past 18 months. Shares of TLT recently breached the channel; it has also hit an RSI level that has historically led to pullbacks in the past. It’s likely topping out at this level, which means that investor fear will fall and equity markets should bounce.

TLT

APPLE (AAPL). Shares of AAPL have formed a well-defined rising channel. Each hit of the top trend line has preceded a pullback; likewise, each touch of the bottom trend has led to a bounce. In a previous post two weeks ago, we argued that AAPL was topping in the 116-120 area (and sold calls at that level). The risk/reward has now shifted. We believe the $103 area will be strong support right at the bottom trend line, and it also coincides with the top of the two month triangle formed in Aug-Oct. While there is likely $5 of downside risk, there’s roughly $12-$15 of upside risk back to the top of the channel and all-time highs. Wouldn’t be surprised to see a bounce off the 50 DMA right around currently levels.

AAPL

AAPL has also formed a bullish falling wedge pattern. We saw a false breakdown today with shares dropping below $107.50, but they recovered and closed back within the wedge. This type of action often precedes a breakout in the opposite direction. With every piece of news around Apple being very strong for long-term fundamentals, wouldn’t be at all surprised to see a re-test of the highs going into its earnings in just a few weeks.

AAPL Wedge

ENERGY SELECT ETF (XLE). We posted the chart below several weeks ago, just as the XLE was bottoming in October. Based on historical comparisons, we expected shares to see a Fibonacci retracement of between 38.2%-50% within six weeks (which we exactly saw) followed by a re-test of the lows (which we’re seeing now). Each time the shares have seen a mid-teens RSI, it has followed the same pattern. At this point, we expect shares to rebound to the previous consolidation area ($84-$86) within several weeks.

XLE

EXXON MOBIL (XOM). Shares of XOM have formed a crystal clear, well-defined head and shoulders pattern. In fact, it’s one of the sharpest H&S patterns we’ve seen in a long time. A perfect neckline that has acted as strong support, shoulders around the same level that lasted the same length of time. Picture perfect. However, it’s our expectation that this is a bear trap. With the broader markets, and the energy sector more specifically, showing signs of bottoming, this is likely a good opportunity to pick up XOM near the year’s lows with a well defined exit point.

XOM

CORN. Shares of CORN have formed another well-defined inverse head and shoulders pattern. It looks like this has at least $3-$4 to the upside over the next few months.

CORN


Peak Apple? Investor Sentiment vs. The Charts

NOVEMBER 19, 2014 (11:00 PM)

One of my distinct memories from the Apple stock price collapse in late 2012 was the widely circulated post in September of that year explaining why Apple was heading straight to $1,000. Another was the circus of analysts raising price targets, each clamoring for the highest number they could reasonably defend (no matter the assumptions).

With shares of Apple up 53% over the past year (and 17% over just the last month), there has been a resurgence of exuberant sentiment. This sentiment is widely shared by sell-side analysts, buy-side institutions (publicly) and retail investors. Just look at these articles, all posted yesterday on various financial media sites:

And then there are the numerous price target raises over the last several days. Morgan Stanley ($126), Cantor Fitzgerald ($143), Oppenheimer ($130), BTIG ($135), RBC ($120), Hilliard Lyons ($137).

Sentiment is extremely bullish right now, with the iPhone 6 and iPhone 6 Plus running on all cylinders and high expectations for the iWatch. The Mac business is doing well, and who cares that iPods and iPads are becoming less and less relevant. Frankly, I don’t. But the last time we saw this show, expectations were at similar levels and investor confidence was very high. When was the last time investing with the herd was the absolute right choice?

THE CHANNEL. Since the double bottom back in June 2013, Apple has formed a very well-defined rising channel. Each touch of the upper trend line has resulted in a roughly 10 point sell-off within 4-8 weeks. Excluding a two week period in April, every touch of the bottom trend line has resulted in a quick and meaningful rally. It is likely time for a breather.

AAPL

20 YEAR TREND LINES. Over the last two decades, two significant trend lines have been created. Interestingly, we’re reaching the point at which they meet. And that just so happens to be at the $115-$120 inflection point we’re currently sitting at.

AAPL LT

CLOSER LOOK. This is a closer look at the 20 year trend lines, zoomed in to the period following the financial crisis. Arrows have been added to make it crystal clear how significant these trend lines are. Apple shares touched the bottom trend line during yesterdays highs. They have not yet touched the higher trend line (roughly $120). But it’s that lower trend line that has been a more important factor over the past two years.

AAPL MT

CONCLUSION. With Apple sitting at a 17.8x valuation – almost 1.5x higher than its peak value in 2012 – many continue to jump on the bull bandwagon. Based on the historical valuation along with the charts above, I believe it’s getting heavy. That’s not to say it can’t, or it won’t, continue rising. But in the $115-$120 range, the easy money has been made.

As a side note, there are 190,000 open $100 calls in January 2015 (8 weeks away). Those market participants who sold the calls (typically institutions and market makers, i.e. the “smart money”) stand to gain $285 million if shares close at or below $100 vs. current levels in just 8 weeks time.