Apple’s Down Five Days in a Row: Here’s What to Do Now

Keith Fitz-Gerald Aug 05, 2015
27 

Apple Inc. (NasdaqGS:AAPL) lost another 3.2% yesterday on more than double the usual volume, making many investors wonder if it’s time to throw in the proverbial towel. It finished the day down 14% from the $133 a share high it set in February, and paper losses now tally $133.4 billion.

To put that in perspective, Apple’s just lost more than McDonald’s, which carries a $95 billion market cap, is worth.

I can’t help but think this is great.

Stocks like Apple rarely, if ever, take a break like this. That means you’ve got one whale of an opportunity on your hands, and a unique chance to buy in when everybody is running the other way.

Today we’re going to talk about why, and the best Total Wealth Tactic to play a situation like this.

The secret is capitulation – and it could mean a double-digit discount for you in one of the most promising sectors in the world.

There’s no question that Apple has taken a beating in recent trading. The stock dropped another 3.2% and closed Tuesday at only $114.64 a share after five consecutive days of selling. Yesterday, in particular, was a blood bath on roughly double the average daily volume.

Ostensibly, the story is about weakening demand in China, which is one of Apple’s biggest markets, and the burden of higher expectations associated with iPhone and smartwatch sales that have fallen short of analyst projections.

We’ve talked about both of these things before. China is no more going to disappear than America is, and Wall Street analysts rarely get it “right.”

So you owe it to yourself to keep things in perspective.

Besides, we’ve seen this playbook before. The stock’s current slump is nowhere near as bad as the one three years ago, when Apple fell nearly 50% on concerns that the company had run out of clever ideas and was being eaten alive by the competition in both the smartphone and tablet markets that it created. If you do the math, that works out to a split-adjusted fall from grace at $100.72 in September 2012 to $55.01 by April 2013. Yet Apple was on track and climbing steadily again by June.

Source: Yahoo!Finance
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My point is that healthy companies have give and take. Apple has, in fact, fallen below its 200-day moving average 17 times and, in each case, it’s taken about 30 days to get back on its feet.

The way I see it, the current pull-back isn’t unexpected right now, for three reasons I laid out to Fox Business Anchor Deirdre Bolton last night on Risk & Reward:

  1. Apple makes up roughly 4% of the Dow, 12% of the Nasdaq, and 3.6% of the S&P 500. So it tracks the indices pretty closely, perhaps even drives them. There’s probably some institutional profit-taking, rebalancing, and indexing going on, too.
  2. Apple is one of the most widely held stocks in the world and, chances are, if you’ve got any sort of retirement plan whatsoever, you own it. That means it’s going to move on individual whim.
  3. Yesterday’s rout on roughly double the normal average daily volume smells like capitulation, something we haven’t seen in a while.

Ergo, Apple may be a great “buy” at these levels. No, scratch that. Apple is a great buy at these levels. Three to five years from now, the current drop is going to be nothing more than a blip.

Fundamentally, this makes a lot of sense if you think about it.

Apple has a long history of creating devices that fill needs people don’t even understand they have… then turning them into industry standards. That means the iPhone and tablet sales everybody is fixated on now are nothing more than a delivery mechanism and Jobs’ legacy.

Current CEO Tim Cook has made a brilliant pivot into something I’ve termed the ecosphere. Very few people understand the vision, but it’s one that revolves around a product set that hasn’t yet been priced in and products that aren’t yet on the market.

I’m thinking here about things like Apple Pay, Apple powered cars, TVs, even buildings, artificial intelligence, and form factors that haven’t been invented yet but which you can bet are already on Apple’s drawing board.

As for the notion that the watch is a dud… so what. I don’t know a serious trader or investor who thought it was going to be a winner. The thing was a dud from day one, so the market has never priced that in to begin with.

Apple Has Hit an Inflection Point – Just Not the Kind Panicked Sellers Believe

The real value in products like the watch is in the conversation with consumers who are gradually being led to Star Trek-style communicators that will transcend the smartphone, tablets, wallets, and wearable tech we think about today.

We have an aging population that increasingly prefers the simplicity of Apple designs over Droid. So the upgrade path is assured as long as Apple remains true to its design ethos.

And finally, Apple’s probably going to grow revenues and earnings by 25 to 35% a year for the next five to 10 years. That’s rarified air in today’s stimulus-laden, politically charged environment.

But that still doesn’t answer the question of why make your move now, nor the question of how. For that we need to return to the trading itself.

To hear the bears tell it, the selling is so severe that Apple has dropped below not one, but two critical measures. It’s now trading below the 200-day moving average many institutions use as a line in the sand to judge momentum. And, according to Bespoke Research, Apple is farther below its 50-day moving average than it’s been in the past 12 years.

That sounds bad, but here’s the thing… when there’s this much duress and this much pressure, you’re bound to get mispricing. That’s where something called “capitulation” comes in.

If you’ve never heard the term before, capitulation is a technical trading condition that reflects a shift in psychology that’s really a reflection of investors who give up. It’s often a key inflection point characterized by increasingly panicked selling that is much like the crescendo in music… a sharp loud burst.

You can see that very clearly in Apple at the moment. Price has dropped precipitously and volume has spiked to roughly double the most recent average daily levels.

Most investors are in such a rush to sell that they fail to recognize that capitulations are frequently a sign that the bottom is at hand or close to it, because everybody who wants to sell has already sold.

This Simple Total Wealth Tactic Can Mean Double-Digit Discounts on Your Trades

Now, don’t get me wrong. Capitulations are not a sign that you want to blindly buy in. Any company that suffers one could fall further before getting on its feet, including Apple.

Instead, split your money into chunks that you use to buy Apple shares over the next three to five months using one of my favorite Total Wealth Tactics: Dollar-Cost Averaging.

What I like most about dollar-cost averaging is that it helps you avoid the neck-snapping volatility that plagues other investors, especially when it comes to a stock like Apple. It’s also a great way to inject discipline into your investing process automatically, while also removing emotion from the equation.

And finally, dollar-cost averaging lessens the risk associated with buying a large amount of stock at the wrong time, because it helps you work with the markets, not against them.

Storacewealth.com
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Over time, you’ll actually accumulate more shares for less, yet still have all the upside you can handle…

Even if Apple drops for a sixth straight day.

Until next time,

Keith

27 Responses to Apple’s Down Five Days in a Row: Here’s What to Do Now

  1. Barry says:

    Keith

    Great company , up plenty , will hold for long term

    Thanks kieth , take care

    • Keith says:

      Thanks Barry.

      Don’t forget to keep an eye on risk management in case I’m totally wrong or the company does something dumb.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  2. Jim says:

    Very good Keith. I bought a one lot today before I read your piece just because I too think this sell off is overdone, but it’s always good to hear someone smarter than you agree.

    • Keith says:

      Thanks for the kind thoughts Jim but smart is an awfully big word! I put my shoes on just like everybody else.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  3. Robin says:

    Keith thank you for some perspective on Apple. I wonder if some of Apple’s current weakness is a reflection of the “broader market’s” overall worries about the “toppy-ness” of the US stock market and it’s seeming inability to pull out of the month’s long choppiness we have been in?
    Averaging in to a high quality company like Apple makes sense, but what is your take (opinion, prognosis, point of view) on the overall health/prospects of the US markets. Can you link to where you may have discussed that?
    Thanks.

    • Keith says:

      Hi Robin and you’re welcome.

      That’s my take. Apple is among the most widely held securities in the world and that means there’s a blend of owners ranging from individuals to hedge funds and institutions. That means Apple is going to experience volatility based on how those entities are managing their money, indexing and even as part of securities arbitrage. The stock will also reflect profit-taking and even the same uncertainty as a result.

      I’ve got a wide variety of articles out there but our Total Wealth Archives are a great place to start for general discussion. I’ll put some of the best links in an upcoming weekender.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  4. H. Craig Bradley says:

    APPLE AS RODNEY DANGERFIELD ?

    How do you explain the fact that most stocks in most sectors are down about – 10% since June? The market’s fundamentals are weak at this time. We are already in “correction” territory, except for a half-dozen large tech stocks. Facebook is among them. It hardly has gone down and is up so far this year. Its valuation is about 90 ( P/E) ratio and its earnings about $1.03 ( according to Yahoo finance). They have more mobile ad revenue. What else?

    Now, compare the earnings of Apple at $8.50/share ( even though they missed the “whisper” numbers ). Apple’s valuation now is about 13.5 ( P/E only 17 at its peak price this Winter). What am I missing about Facebook? Apple’s earnings and revenue growth just never gets any “respect” from the market these days.

    • Keith says:

      As usual, a very sharp observation Craig. The market has, in fact, become increasingly narrow. I think it comes down to the fact that Apple is making the transition from growth stock to one that runs more in sync with metrics normally applied to value stocks. That suggests the “respect” or lack thereof may come down to institutional managers who no longer believe they can generate “alpha” (incremental returns) by holding Apple because it is so widely held. What’s interesting about this is that those very same managers are also biased by their emotions and perspectives – only it’s more dangerous for them by virtue of the fact that they’re leveraged up to their eyeballs and have hundreds of billions on the line.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  5. Dr. Ouarab says:

    Thank you for your analysis which confirms exactely that I am on the right path . As soon as we approached the low end of the gap 112-115 i restarted new buys and made 2,45% benefit the same day.
    I adore this doomsday psychosis. I hope there will be plenty of these ” very clever” traders who are throwing Apple shares away and help me make a
    fortune for my children and grandchildren .
    Look at Carl Icahn. Didn’t he say this is the deal of the half-century?
    Well ! After all , he reaped 3 billions. By now!
    Wait until the Apple share reaches 175 $ .!!! But for this he ( we ALL) needs today’s sellers. God bless them!!!

    • Keith says:

      Hello Dr. Ouarab and thanks for sharing your experience. It sounds like you’re making some very smart moves. Way to go!

      Don’t forget to include risk management as a part of that. You never want to be left holding the bag if the markets have other ideas no matter how much potential Apple has.

      Best regards and thanks for being a part of the Total Wealth Family, Keith πŸ™‚

  6. Bob Eisenstadet says:

    Bull put spreads, one or two strikes out of the money, work well in the post-capitulation phase and provide a downside trading cushion. For those with more capital, cash covered puts one or two strikes strike out of the money will generate premium income and get you in at a lower price (if AAPL drops to your strike price). Then you can sell covered calls on any shares put to you, generating more income while AAPL recovers . Also note that AAPL has both monthly and weekly expiration “mini-options” (which can be written on 10 shares of stock. Regular options control 100 shares.

    • Keith says:

      Well done and well expressed, Bob.

      A superb tactical playbook, too for those wanting to move beyond stocks.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  7. Marcel Thevoz says:

    one way to deal with Apple’s stock weakness is to sell puts into the future instead of just averaging down and selling calls at higher levels for august and September. All these premiums being used to lower the cost
    of outright positions.

    • Keith says:

      And another one, Marcel.

      You guys are sharp and these are terrific ideas.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  8. mpumi malangabi says:

    Is it correct that Apples revenue declined 40 percentile in the Chinese. Small investors in China lost their proverbial shirts thanks to 5:1 leveraged margin accounts. This I believe is a spaner in the works for Apple.

    • Keith says:

      Hello Mpumi.

      The sequential change was -21% as revenues dropped from $16, 823 to $13,230 from Q2 to Q3. However, the Year over Year change is 112% for Greater China according to Apple.

      It will certainly be interesting to see if Apple is impacted by the margin move.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  9. yngso says:

    When you mentioned China weakness I thought about the strength of the USD. Maybe US intl companies haven’t been hurt so much because the world economy isn’t that weak after all?
    You mentioned Star Trek, and I did too once. Mybe Apple will make some of the systems on the Enterprise?

    • Keith says:

      Hello Ynso.

      That’s a very interesting idea and it’s certainly possible.

      As for Star Trek…I’ve heard that Apple graphics drive the movie sets and, in particular, the bridge computer displays. Anybody in the Total Wealth Family a movie buff who knows?

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  10. Eric says:

    There is no Apple weakness in China. Revenue was up 112% in the June quarter 2015. On the call Tim Cook said that Apple was experiencing no weakness in China. Other American companies are experiencing issues in China for various reasons. For example, Yum Brands has had a chicken issue, which has persisted since last year and the United Technologies elevator division is losing market share in China. The talk of an Apple slowdown in China is a myth.

    The Apple Watch is a new product catagory and will take some time to gain traction. So far, sales have exceeded the first iPhone and iPad launches and greatly exceeded the entire smart watch industry 2014 sales. Many analysts were overly aggressive in their initial sales estimates. This is why some consider it a failure.

    The consensus forward earnings growth before the large reduction in share price was 12 percent. Over the last few days some analysts have increased their forward EPS estimates. Even at 12 percent this growth rate in much higher than the majority of the market and more than twice the average market growth rate. With a trailing P/E of 13.x AAPL is inexpensive.

  11. Richard says:

    The market took a bite out of AAPL.

  12. David says:

    Keith,
    What is dollar cost averaging and how do i implement it into my stock (s) purchase?

  13. Mike says:

    I was at the mall on Thursday on a dreary rainy day. We all know that malls are dying but the Apple store was packed. It looked like everyone in the mall was in the Apple store. As I walked by I thought I really need to get into this stock!

  14. Bill Webb says:

    Keith – my loss stop just kicked in for KTOS @ $5.20 per share. Do you still view this stock favorably? I’m thinking if you do, I might put in a limit order to see if it drops further to a 52-week low of around $4.25. Your thoughts please. Thanks!

  15. John says:

    Hope you’re right. Many people were also very bullish on Apple a few months ago when it dipped to $125 and some
    were expecting a summer rally. Only time will tell …

  16. tom says:

    Buy low
    sell high

    Apple came down for 100 to 55 and is back around 115 this is true in the short term

    Longer term the 2008 crash took aapl from 28 to 12 and then a FED driven program took it to 115

    So aapl went from 12 to 115 we are 6 1/2 years into a FED driven market bubble we will go higher
    but better to take profits now and get out early….build cash….you have been warned

  17. John Boudreaux says:

    Keith, The recent dip in ALNY seems crazy given the many positive things I’ve read lately about the great partnering with Sanofi and other product research almost all going on a positive track. Do you think I’m crazy for continuing my belief that they are a real winner as I keep adding more of their stock to my portfolio ? And my belief that good medical biotechs will probably not be hit much by the coming devaluation of the dollar ? Thanks,
    John

  18. tom lamont says:

    Great comments on Apple Keith, and its not a rotten apple in that barrel! I agree that capitulation is on the horizon and this spells opportunity! Investors would be wise to start selling series of puts on Apple. This can build a nice holding at fire sale prices, and even if the stock is not “put” to you, the premiums can provide some nice income to favour your bride with a welcome trip or gift!

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