August 9, 2015 – UPDATE #1
So it seems that the title of our blog post has shifted from a prediction to more of a war cry. We will prevail! But we need to recognize that a prediction is simply one possible outcome. We always need to plan for other scenarios and know how we will react given a variety of circumstances.
We recognize that our recent posts may begin to sound like a broken record. But it all comes down to an important aspect of investing. An uptrend is defined as a series of higher highs and higher lows. In the intermediate-term, we continue to see higher lows. As long as Apple remains above $105, the intermediate-term uptrend will continue. However, the very near-term may see price continue to struggle a bit.
LONG-TERM TREND LINE. Let’s begin with the big picture. Shares of Apple have formed a well-defined and validated trend line since hitting the lows after the 2008 financial crisis. The trend line was tested in mid-2013 and fully validated in early 2014. Last week, this trend line was tested again and has since held. It’s also important to point out that each previous test occurred while price was below the important 25 ema, so the fact that it’s currently trading below that level is not the end of the world.
What’s interesting to note is that on each test of this trend line, we’ve seen very similar action in the Bollinger Bands. During the test of the trend line, the BBands became extremely compressed and shares closed the week near or below the lower BBand. Over the following 3-5 weeks, shares rallied to above the upper BBand in each case, which happens to currently stand at $133 (exactly where price was rejected just 3 weeks ago). This also tends to correlate with the typical price action following any weekly close near the lower BBand, after which we typically see a rally. Shares are extremely oversold, sentiment is very bearish, and headlines about a “2012 repeat” are flashing on common news headlines – all signs of a potential bear trap and reversal.
NEAR-TERM BEAR FLAG / 200 DMA. While we continue to be very bullish on shares in the intermediate-term (2-6 months), shares may struggle over the next few days due to a potential bear flag that has formed below the 200 day moving average. For full disclosure, we are holding zero near-term positions. We will not meaningfully adjust our intermediate-term positions unless Apple falls below the $104 level that marked the previous low from January. Below that level, it will have created a lower low on an intermediate-term basis. Above that level, the intermediate-term uptrend will not have been broken.
On the chart, you’ll notice three distinct areas. Below the $104 level, we will exit the majority of our intermediate-term positions and turn bearish due to price creating a lower low. Above $119, we will increase our bullish positions as shares re-take the significant support level and the 200 dma. Between those two levels, we are relatively neutral and will only slightly adjust our intermediate-term positions. You’ll notice we said nothing about our long-term positions… this is because from a fundamental perspective, Apple is running on all cylinders and we expect much higher prices. But for more time-sensitive positions, we may not be able to outlast a downturn, even if (especially if) we believe the market is mis-pricing an asset.
FIBONACCI LEVELS. We put the chart together (including the shaded blue circles at Fib levels) last Monday. While the 61.8% Fib retracement was briefly pierced, it generally held up as support.
DIVIDEND-RELATED PRICE ACTION. Since the restoration of its dividend, shares have tended to move approximately 10% in the 2-3 weeks following the ex-div date. These moves were not all to the upside, but the 10% volatility was relatively consistent. This implies a move from $115 to either $104 or $127. Significantly, this defines the January low we discussed earlier, as well as the bottom of the post-earnings gap. Based on the oversold conditions, we would expect this to be toward the upside; however, we cannot discount the possibility of continued downside. During the 2012/2013 correction, during which shares slid into the dividend, the share price continued down. But in each of those three instances, shares saw a very big oversold bounce.
NASDAQ. It’s always important to look at the broader market when analyzing any specific stock. The QQQ’s have been trading in a well-defined uptrend over the past year. While many discuss the 50 dma, it has not realy been a meaningful indicator over the past several months and we don’t put much emphasis on which side shares are trading on. More importantly, we’re watching the rising channel; unless shares break to the downside, we do not see a significant risk for the broader markets.
August 2, 2015 – ORIGINAL POST
Pessimism seems to have reached a fever pitch among Apple investors – even many long-time shareholders. The Apple Watch is clearly a dud. There’s no chance the iPhone 6S will beat last year’s 10 million unit first weekend number. Sales in China are slowing and hitting Apple particularly hard. The Apple TV isn’t going to be the transformative product we hoped it might be. The speculation of an Apple Car means that management is taking its eye off the ball.
We disagree with each of those statements, but these are the kinds of accusations that many knowledgeable and long-time Apple investors are beginning to use to explain the post-earnings price action. Investors are nervous and shares of Apple are now pricing in these low expectations throughout each of their business lines. As the sentiment begins to shift, likely sparked by increasing excitement for the September iPhone introduction, we believe the direction of least resistance is up.
CONSOLIDATION. Since mid-February, shares of Apple have been trading within the $119-$134 range. Strong support exists at the $119 level, and on top of that, the 200dma is sitting just above that level. We expect this support level to hold. That’s not to say shares can’t dip below them for some short amount of time (which we see often and is an institutional accumulation to buy up all the sell orders that are stopped out). Remember, this downtrend has lasted all of 8 days. Looking at the bigger picture, we’re still firmly within the consolidation range.
WEEKLY CONSOLIDATION. Here’s a broader picture. You can see several instances of consolidation. This is a longer one than normal, but it’s nothing too extreme that we haven’t seen before. Keep this in mind.
LONG-TERM UPTREND AT RISK? We’ve heard several readers mention the fact that shares have fallen out of the long-term uptrend. That is absolutely true – this uptrend channel is at risk. However, it has not yet been confirmed. We saw this exact same scenario in early 2014, after which shares re-took the channel. Almost every part of this recent price action looks similar to the prior comparison.
BOLLINGER BAND COMPRESSION. This one is extremely important to us. Every single time the shares closed at the bottom weekly BBand, shares have rallied 7-10 points (10%+). This price action is very similar to the three instances in 2010 and 2011 (RSI between 45-50, shares at lower BBand, shares closed below 25 weekly ema, BBand width at historical lows). With all of this in place today, along with the fact that the $119 support AND 200 dma are just below current price, we believe the downside is very limited. We are buyers at current levels.
DIVIDEND TRENDS. We wanted to see if dividend reinvestment had any impact on share price, so we put the following chart together. What we found was a bit of a surprise. Following the dividend (ex-div date), shares either rose or fell 10% within the next 2-3 weeks. The 3 times it fell was during the 2012-2013 crash in share price. It has risen by 10% in each period prior to and after shares stabilized.
BUYBACK BLACKOUT PERIOD. Based on Goldman Sachs and the WSJ, Apple has a blackout period on its share repurchase that extends from five weeks before earnings to 48 hours afterwards. We estimated the blackout periods below (shaded grey). From the end of the blackout period to the highs of that period, Apple tends to rise roughly 13% in 3-5 weeks. There were two occasions when the rise was 6%. One was followed by a nearly 17% rise in 5 weeks. The other was last quarter (and we have yet to see how this period turns out).
HISTORICAL COMPARISON: November 2011. Shares of Apple exhibited an eerily similar price structure around the October 2011 earnings report. After testing the 200dma, a rally and gap up to re-test all-time highs was formed leading up to earnings; that gap turned into an island gap reversal when the otherwise strong earnings did not meet high expectations. Shares the consolidated and fell back to the 200dma.
Once the 200dma was re-tested and support held, shares began a climb back up to all-time highs over the next 5 weeks. Look at the chart below of the recent action before and after the latest earnings release. If support holds at $119, which we do expect it to do, we should see a climb back up to the all-time highs leading into the introduction of the next iPhone.
NASDAQ. Lastly, it’s always important to analyze the broader markets when looking at any given stock. The QQQ’s have formed a solid uptrend over the past year and recently hit an all-time high. While most are watching the breadth – which has admittedly been low – during the recent market rally, price is the most important indicator.
CONCLUSION. We will never advocate a “buy and hold” strategy here. It works for many people – but it’s simply not what we do. We try to take advantage of low risk/return opportunities. We held a number of intermediate-term Apple options through earnings – something that we rarely do. One thing that’s important to remember when you own stock or derivative positions is to constantly ask “would I buy here?”. If the answer is no, sell. Otherwise, holding is likely the right move (unless theta burn is an issue on near-term positions). We are buyers – and holders – of Apple here. As always, if Apple does not move as we expect and breaks down below its 200dma and $119 support, our stop losses will be triggered and we’ll be out. Otherwise, we expect to participate as the price action turns around.