Apple Is Resilient, But Hasn't Bottomed Yet

On the heels of the worst possible news that an Apple (AAPL) fan could imagine, investors rebound the stock with seemingly little remorse. But is that what really happened? Did Apple investors simply shrug off the news of Steve Jobs medical leave of absence and pump the air back into the stock? Hardly. And if you think so, then you’re living with blinders on.

If you lived in a world where there were no other stocks or markets, as many Apple investors seemingly do, then you would have to believe that this stock is such a titan, with supernatural staying power, that not even the fall of the fearless leader can keep it down.

There’s no doubt that Apple took it on the chin in after hours trading from the News of Steve Jobs leaving Apple. The stock was down almost 10 percent at one point. Thursday morning, the stock opened at $80.57, nearly 6% off the previous close, and at first it looked like AAPL might drop below 80, revisiting the November lows. But as the session got going, a rally ensued, in which Apple regained much of what it had lost from the day before. The stock settled at 83.12, down 2.29% from Wednesday's close, and just a bit off the high of the day (84.12), plotting a hollow red candle. Apple regained nearly 70% of its overnight loss.

Normally this would be considered bullish. But if you were paying attention to the broader markets, you would know that the rally was due to a confluence of technical indicators and some government intervention, just for good measure. The rally was not due to the relative strength of Apple, but instead it was the combination of the extreme oversold conditions that developed over the past six down sessions and the support levels on the indexes. On the S&P, this level was at 820. It just so happens that when the index reached this level, so did the oversold indicators peak. And the rally was on.

Had this been a real bottom, the rally would have been much stronger and all the indexes would have broken through the support levels each had recently lost. On the S&P this would be 860. But this didn’t happen, in fact the response was fairly weak, as the rally was stopped short at Wednesday’s close. What is more likely to happen from here is that we may advance a little more to unwind the oversold conditions, and then continue down.

The government intervention came in the form of a bailout program that narrowly passed by the Senate, where they released the remaining $350 billion of the TARP monies to president-elect Obama upon his request. This was to avert a slowdown in putting the bailout money to work during his transition into the White House. The plan was announced just a half hour after the rally started, which fueled it into the close.

As I said, we have yet to fully unwind the oscillators, so I expect the rally to continue for a day or two. I would expect the same from AAPL as well. But I think AAPL will find significant resistance at 85. Don’t get excited by this move, this is not a reversal, this is a temporary relief of pressure, only to resume the move down. The facts are that there is no good news out there and it’s getting worse. Unlike the rally we had in December off the November lows, it seemed that no matter how bad the news was, the markets simply moved forward. The situation is quite different now, every bit of bad news is another wound opened on the economy. Soon it will be just a bloody mess.

Stock position: None.

Comments

[Roger Knights:]

I just put in a limit order for a lot of Feb. 115 calls. Let's see what happens to AAPL.

Jan 16 05:08 AM

[mollytjm:]

i think people are starting to discover that Apple isn't mostly Steve Jobs. He made it great and he secured it for the future...by bringing on an enormous staff of absolutely brilliant people who are all still in place to produce the next wave of innovations/products.
for value investors, this is the time to shop! I don't understand the rest of you since i'm not a gambler..i only visit Vegas, which i love, for the entertainment and shows. When it comes to stocks, I only invest in companies that are fiscally sound, secure and growing.

Jan 16 09:42 AM

[constantnormal:]

Roger, I sure hope you're selling those Feb 115 contracts and not buying.

But it's your money.

I'm looking for the inexorable grinding away at the global consumer by soaring inflation and eventually rising prices (as Bernanke succeeds in destroying the US dollar to replace the deflation with inflation) to take a toll on AAPL, with revenues slowly declining (due to the brilliant subscriber accounting method used for iPhones and iPod Touches -- d'ya think that Apple foresaw this economic morass when they elected to do that, or was it just dumb luck?) and their huge cash position cushioning the company from any economic shocks out in the Real World. Eventually, 15%-20% unemployment will take its toll in the consumer companies, and Apple is not immune to this, merely extremely resistant.

I expect the company to be a remarkable fortress of balance sheet strength, but as the money available to buy stocks declines along with the Incredible Shrinking Global Economy, the stock price MUST decline.

This is not any indication of a lack of strength in Apple, just a reflection of the obvious fact that in a smaller global economy, all the companies will be smaller too. AAPL will suffer less than nearly all other companies, but it will suffer its share of shrinkage, some from revenue shrinkage, some from PE contraction.

I remain amazed at the number of people who apparently believe that the fate of Apple hinges on the return of Steve Jobs. Steve never designed a single product or component, never wrote a line of code. His role is to keep the company oriented and focussed, and to keep kicking them to ever-greater heights of creative inspiration. But he does not supply the inspiration. All the organization that made all the great products that have put Apple where it is today are still in place, and the product pipeline for the next 5 years is almost certainly in place. If Steve should vanish from the face of the Earth overnight (God forbid), it would be at least 5 years before the company began to waver from the trajectory he has launched it on, if it ever did. The meme of The Steve is strong within Apple, one can make a case for it lasting long after he leaves the company. One could also see a return of a series of clueless CEOs like those that preceded his return, but I tend to think that is unlikely. There is a wealth of talent in place that will keep the company aligned to doing the Insanely Great work that has made it the giant that it is today.

But even giants shrink a bit when the world around them shrinks, and so I expect AAPL to shrink over the next few years, which only increases its value.

full disclosure: I own a small amount of AAPL in IRA accounts, and disposed of a large position in AAPL LEAPs last summer. Eagerly awaiting $60 AAPL so I can go long with LEAPs once more.

Jan 16 12:26 PM