The summer of 2011 looks to be an instant replay of the summer of 2010. Economic confidence has once again been shaken by austerity scare tactics. President Obama, Chairman Bernanke, Treasury Secretary Tim Geithner, along with select members of Congress preached the same fear-based rhetoric to the US that we heard last year in Europe.
The threat of U.S. default rattled confidence to the point that a debt reduction deal was reached but it didn’t happen without consequences. Uncertainty coupled with a loss of confidence results in short term economic contraction. Consumers and businesses do all within their power to reduce risk when the political/economic climate is dominated by fear. Economic data points released during the month of August will be influenced by Washington’s ineptitude.
Selling the portfolio to 80% cash (following Apple’s (NASDAQ:AAPL) earnings report) in order to avoid any sort of broad market exposure during this period was the right move. Investing in a strategy of safety during the Dow’s 900 point decline is the result of understanding which economic variables move the market, why they move the market, and when they move the market. Timing means everything in this era of volatility.
If the 2010 movie is going to replay itself in 2011, then we better have a solid grasp on the precedent. In 2010 the August swoon began on August 4th (Dow 10,738) and lasted until August 31st (Dow 9,915). This year, the selloff began on July 22nd (Dow 12,768) and is likely to result in another subpar month of August. In both scenarios the snapshot of the economy in August was the result of months and months of negative political influence. Everything from employment to manufacturing can be affected. However, such an impact is usually reserved for the short run and the debt worry will eventually be replaced by the optimism generated from our thriving private sector leaders. The tale of two worlds continues to push and pull this market.
The confirming catalyst of the end of the 2010 dip was Apple’s stock performance. Because of its strong July earnings report strength, Apple didn’t want to sell off with the broad market. It fought and fought until succumbing to a $9 drop on August 11th, seven days after the market began its correction. Then it fought and fought to hold the $250 level until it experienced deep drops on the 23rd, 24th and 27th of the month. By the time it was all said and done Apple had dropped 12%.
The end came when Apple strongly reversed its intraday action on August 27th which served as a forward looking catalyst for the broad market recovery on the 31st. From Apple’s low of $235 on August 27th it rallied 36% to $319 by October 18th. The Dow rallied 16% from a low of 9,915 on August 31st to a high of 11,505 on November 5th. Correctly timing the fall run can be quite profitable.
Now is the time to wait as the market prices in the current iteration of the sovereign debt variable. Judging from recent headlines it appears the hedge funds will attack Europe once again in order to secure an August selloff. An Apple reversal later in the month should trigger the end of this year’s correction just like it did last year. Apple is trading very similar to its 2010 pattern.
Apple initially fought the broad market and actually hit a new high of $404 on July 26th but then, five days after the market began its swoon Apple dropped $10 on July 27th, and dropped another $9 on August 2nd. Calculating similar performance to 2010 gives us price targets of $356 for the August low and $484 for the October high.
Because of the new September/October iPhone 5 event this year that we didn’t have last year, it’s doubtful that Apple will be able to drop all the way to $356 but certainly $370-$375 is within the realm of possibility; especially if the market reacts negatively to economic data and euro concerns throughout the month. The conviction you see in today’s Apple buyers will be harder to find twenty days from now but that will be the time to load.
Disclosure: I am long AAPL.