This is a week of divergence. Let me explain.
The market is clearly in a bad mood. Last Tuesday, I mentioned that the market had entered the 'heart of the correction'. Everything from retail sales to Warren Buffet’s NY Times letter to Bernanke’s QE2 to European debt contagion to U.S. tax policy is being interpreted negatively. The 35 largest banks being lead by Bank of America (BAC) are approaching 52-week lows because they need to raise $100 billion more by 2015 and investors remain skittish about the potential of foreclosure legal woes. Although Ireland looks close to resolution, investors quickly want to talk Spain and its larger implications. The media is obsessed with keeping the gold rally alive based on the fear of inflation.
Keep in mind, the market is in the process of forming a new identity that we are calling stage three of the market recovery. Nobody knows which variables will lead us and nobody can be sure of the direction either. But today we are seeing the return of an old friend ... we are seeing the Apple (AAPL) slingshot attempting to halt the selloff. Early in the day Apple was up $3 and as the Dow sold off 130 points, Apple remained in positive territory and finished the day up $6.60. Can the Apple slingshot do it again? Will the market leave its worries behind and use Black Friday as a positive catalyst? According to recent history, the outcome of this week’s action will determine the next three months of returns.
If Apple can reaffirm its slingshot ability it will most likely follow the 2007 path that witnessed a November 19th low of $163 followed by a rise to $182 by November 30th and $198 by December 31st. November 19, 2007 was the Monday of Thanksgiving week, Tuesday saw Apple rise $5, Wednesday Apple was flat, Friday Apple was up $3.50 and then a run with only 2 down days brought Apple to $195 by December 10th. In 2007 it was wise to buy the November low, which is why we added Apple LEAPS to our portfolio last week with Apple hovering near $300. Catalysts such as iPad, Verizon iPhone, China, MacBook Air, Mac App Store, and even Apple TV give Apple stock solid reasons to repeat the 2007 performance.
But what if the market is too stubborn to rise and the Apple slingshot fails this week? Apple investors know that without a good market the stock is unable to buck the trend because of its role as market leader. If the slingshot doesn’t work then we are in for a repeat of the 2009 performance. Thanksgiving week 2009 witnessed Apple $205 on Monday, $204 Tuesday, $204 Wednesday, $200 Friday, and then a drop to $188 by December 7th. From that low the stock was able to muster a nice run to $214 on January 5th but subsequently sank to $192 on February 4th.
2007 was a great year to be fully loaded in short term Apple options because the stock rise outperformed the premium depreciation. 2009 was a terrible year to be in short term options because the stock rise wasn’t enough to keep up with the loss of premium. Determining whether Apple 2010 will act like 2007 or 2009 will, as Robert Frost so eloquently opined, ‘make all the difference’.
Disclosure: Long AAPL