Worrying Wednesday: How Low Can Apple Go?

Includes: AAPL, BA, QQQ, SPY
by: Philip Davis

QQQ WEEKLY I had to do it.

I had to commit to Apple (NASDAQ:AAPL) as our "One Trade" for 2013. I didn't want to do it but there wasn't a stock I felt more sure about beating the market over the next 12 months. The icing on the cake was the drop to $485 (even as I write this, I can't believe the price) on the same afternoon I was scheduled to be on BNN to announce the trade (see full interview and all 3 trade ideas here).

Had AAPL gone up $40 instead of down $40 (a 15% swing), I would not have done it but - COME ON - $485? Are you freakin' kidding me? At this price, we're even adding AAPL to our conservative Income Portfolio - so far it has rightly only been placed in our more active and riskier portfolios but our "One Trade" idea for AAPL is a nice "set and forget" play on the stock with a great return on cash and margin and the "downside" of owning AAPL long-term at net $364 (another 25% off and 34% off our $555 short-term value target).

As the average analyst estimate for AAPL is $728 and the lowest analyst estimate (by the so far, so wrong Ed Zabitsky) by a mile is $270, we feel pretty good about our net $364 entry and, at $270 - we'd love to double down for an average of $317 - down 14.8% at the Zabitsky Line- where AAPL's cash on hand would be about the same as its market price. So, if you REALLY want to own 2x AAPL for net $317, our One Trade entry at the current $485 price is for you!

AAPL WEKELY Sorry for more AAPL talk but, as I said last week: "If they were selling brand new Range Rovers for $40,000 - I'd talk about what a good deal those were all the time as well." As it is, it's AAPL stock that's on sale, underperforming the S&P by almost 30% over the past 6 months - AND IT'S PART OF THE S&P - so that's REALLY awful performance (see Dave Fry's chart). Will it continue for another 6 months? Another year? And, if AAPL doesn't continue to underperform the S&P for another year - then won't it, ipso facto, OUTperform the S&P? TA DA - our One Trade is obvious now, isn't it?

We had an extensive discussion about AAPL and valuation in Member Chat early this morning, so I'll leave it at "if you're not going to buy a stock when it's on sale - when will you buy it?" - and we can move on to whatever else, if anything, is going on.

Boeing (NYSE:BA) is dragging the Dow down this morning as Japan grounds 787s after yet another battery problem forces an emergency landing. NOW we have a problem that changes our investing premise in BA - but not by much as it's a battery and batteries can be taken out and fixed or rewired, which is very different than if the wings fell off the planes when they made left turns or something structural. Still, the design of the plane is very dependent on batteries being used. So, we won't be "taking advantage" of this dip to add to our entries but we won't be panicking either - we'll just wait for clarity for the moment.

SPY 5 MINUTE More importantly, we'll be giving the Dow the benefit of the doubt as BA alone is hitting it for 25 points - the same way we have been watching the Nasdaq ignore AAPL's drag this week and actually show a lot of inner strength considering the giant rock tied to its neck (AAPL is 20% of the index) that's dragging it down. The S&P is similarly affected by the big boys taking a hit, which is why the Russell is king this week, with neither BA or AAPL gumming up the works in the small-cap index and the NYSE, with 3,141 listed stocks - is too broad to be bothered by a couple of laggards - so it too is outperforming the S&P by 50% over the past 5 days, which itself is up 0.8%, even as CNBC et al tell you how badly things are going.

We continue to consolidate along our 5% Rule breakout lines on the Big Chart (see Member Chat) and oil has once again given us a nice $1 dip to $93.15 and that's a $1,000 per contract gain in the futures (/CL) - enough money for many, many Egg McMuffins to start our day.

We're getting a lot of Financials reporting this week and, so far, we're running in-line but investors are clearly nervous so we'll have to clear those hurdles. What's not being reported is more dovish commentary coming from the Fed, with Rosengren now seeing a need for MORE QE, joining the once-hawkish Kocherlakota in the QInfinity camp (as always, see yesterday's post for today's news). As I said to Members yesterday:

Hello…. McFly…. How much more market-supportive does the Fed have to get? The debt ceiling will throw hundreds of thousands of people out of work, that should push the Fed to drop $125Bn a month into the economy at this pace.

Disclosure: I am long AAPL, SCO, GDX, TZA, CIM, GLD, BA, TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Positions as indicated but subject to change (fairly bullish mix of long and short positions - see previous posts for other trade ideas).