"Benjamin Graham was correct in suggesting that while the stock market in the short run may be a voting mechanism, in the long run it is a weighing mechanism. True value will win out in the end." -- Burton G. Malkiel (Economist, April 2003 Princeton Paper. A Random Walk Down Wall Street, born 1932).
As of 1pm EST December 2, 2013 Microsoft hit a new 52-week high of $38.78 and Apple, which left the starting gate reaching as high as $564.33 (its high for 2013), retreated below $555.
"Black Friday" had been good for the share price of both companies, and as both stocks power higher, a buying opportunity may be on the horizon.
Microsoft ended the month of November hitting a 52-week high of $38.29 and Apple shares hit a 2013 high price of $558.33 before closing on Friday November 29th at $556.07.
It's significant to note that MSFT reached its 52-week high on volume that was more than 50% below the 3 month average daily volume. AAPL powered higher on over 90% of its 3 month average daily volume.
The volume on Monday Dec.2nd has been lighter than normal for MSFT and heavier than normal for AAPL
Here's a 1-year chart of MSFT that may give us some clues as to what to expect next. I've included the Bollinger Bands to demonstrate the stock's trading range.
Pay special attention to the fact that as MSFT has rallied since the Oct. 24th intraday low of $33.57, the daily volume has been mostly in decline. As it starts the last month of the year trading nearer to the top of its Bollinger Band range, MSFT looks ripe to me for a modest correction based on its 12-month price pattern.
Large hedge funds and institutional investors may be tempted to lock-in some year-end gains after MSFT's impressive 15%, six-week price surge. A mere 5% correction would bring its share price down to an attractive $36.84 with a robust dividend yield of 3.04%.
An Apple a Day Keeps Temptation Away
Why tempt fate with stocks that are selling for ridiculously high multiples [like Netflix (NFLX), which trades at a forward, 1-year PE of 91) when you can have value, growth and great upside potential with AAPL.
Since the September 30, 2013 low of $474.41, shares of AAPL have rocketed 18% higher, and are up 40% since the end of June. Shares still trade at a current PE of only 14 and a forward PE of less than 12.
As of September 28th AAPL has sustained its trailing twelve month (TTM) operating margin at a 29% annual rate. Not quite as good as MSFT's 34.58% TTM operating margin, but good enough for now.
"Apple is [the] best positioned in the tech world to benefit from this holiday season, starting with Black Friday," Cantor Fitzgerald analyst Brian White, who has a $777 price target on Apple, recently told the Wall Street Journal.
The movement of Apple's share price has definitely lagged the broad market this year as declining growth rates persisted. In the last quarterly earnings report Apple had its third consecutive quarter of declining profits.
Yet in all fairness, both product prices and profit margins stabilized during the same quarter. The company released two new iPhones in September and recently unveiled the iPad Air.
With its the new iPhone 5S, iPad Air and iPad mini with Retina display, "we believe Apple will be tough to compete with this holiday and consumers face the difficult choice over which new innovation," Mr. White said in the Journal article. Translation; sales will likely soar!
Below is a 1-year price chart of AAPL's stock including the Bollinger Bands. Notice at current price levels the share price is above the higher Bollinger Band.
This is the first time in 12-months shares of AAPL have been this ebullient, trading above its historical trading range. In the past, whenever AAPL has neared or touched the upper Bollinger Band it has cooled down in what has often been an opportunistic correction.
Again, let the price chart convince you of the trading pattern AAPL shares have tended to follow. The pattern includes a nice rally higher followed by a correction.
This correction may happen beginning Monday December 2nd or later in the month. Just keep in mind that since September 16, 2013, Apple's shares have shot up from $447.22 to $558.33.
Sellers might be tempted to take some profits off the table. There's support (buyers waiting to buy) just above $524, which would equate to about a 5% correction from last Friday's intraday high. If shares correct to $525, AAPL's dividend yield-to-price would be 2.32%.
And Now the Conclusion with Little Illusion
If you've been waiting to buy or add to shares of MSFT and AAPL, there is an increasing probability of a mild correction. Both stocks are technically overbought and have moved up a long way in a short time.
Those of us who use trailing stops may want to tighten them to protect our gains. Trailing stops are an effective strategy for protecting gains and minimizing losses.
I recently created a chart of one of my AAPL positions where I used a 25% trailing stop loss alert. The chart showed the price movement of AAPL and the stop loss price using a 25% trailing stop.
I entered this position on January 24, 2013 at an adjusted entry price of $461.20. The 25% trailing stop loss moved along with the share price of APPL from the day I bought my shares.
As the chart reminded me, using a 25% trailing stop kept me from prematurely selling my shares of AAPL. I participated in both the corrections (when I averaged down and bought more) and the rallies which culminated in Apple's intraday high price on Monday Dec.2nd.
If I buy a stock I set up a trailing stop percentage alert. If the share price drops by that percentage a trailing stop alert is sent and I sell.
It's my exit strategy discipline which helps me to cut my losers and protect my gains. Whether you own MSFT and AAPL now or later, I encourage you to consider this discipline for yourself.
Keep a close eye on both MSFT and AAPL starting Monday December 2nd. Don't be surprised if you see a trade-able correction before the end of the year.
If it happens, I'm convinced it's a buying opportunity in the midst of an epic bull market for stocks and for patient investors.