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Apple (NASDAQ:AAPL) is scheduled to report earnings on Tuesday, January 24th. Further near term appreciation of Apple’s stock price in the days following their earnings report appears unlikely. We performed a similar analysis on Google (NASDAQ:GOOG) last week here, albeit after they reported earnings. Our analysis is simply trying to match the enthusiasm of the recent fundamental story of these companies and stock price movement in relation to what has happened in the options markets.

Not many will debate the dominance of Apple’s products in their category, nor the fact that its stock price performance has been incredible over the past several years. Just last quarter they reported revenue up 39% and net income up 54%. Though some investors were disappointed, for a company their size, these were impressive results. Their success has driven the market capitalization to approximately $400 billion, second only to Exxon Mobil (NYSE:XOM).

So why is this stock that is still growing that fast trading at a forward P/E multiple of only 12 times? The market may be telling us that this type of growth rate is no longer sustainable for a company their size, and if the growth rate is slowing then it will be difficult to argue for sustainable P/E expansion. Consequently, it seems as if sentiment may be a strong driver of Apple’s stock price going forward, which can be measured in the options market.

We’ve built a model that shows the option action of Apple. We matched the stock price of Apple (black line) versus a weighted combination of the the call-put volume (75% weighting) and the call-put open interest (25% weighting). We chose this breakdown in the belief that short-term volume holds more importance, so consequently should be weighted higher. Additionally, we changed this custom data series into a 10 day simple moving average (blue line) and 50 day (red line) simple moving average to smooth out the gyrations. This first chart shows a five year history of this comparison.

click to enlarge

Apple 5 year chart

In this analysis, we are looking at how far the 10 day SMA is above/below the 50 day SMA (we can also view this in standard deviation terms, as we did with Google). What does this show? It shows that 10 day SMA currently sits above the 50 SMA by 15%. In other words, call buying and ownership on a short-term basis is above levels over where it has been the past couple of months. This is not an extreme level, but still noticeably higher than the recent norm. The next chart here is the same, but just a close up of the past 12 months.

Apple 12 month chart

Moving average crossover analysis is more interesting here. When the 10 day SMA crosses above the 50 day SMA (its current state), stock price performance is typically negative on average. One explanation of this may be because the call buying has already been reflected in the stock price. Backtesting this during the previous five years, there were 29 crossover events. The average performance of Apple’s stock when in crossover up position was -.77%, as compared to when the SMA was in crossover down position (10 day SMA below the 50 day SMA), the average return of Apple was +7.26%. Clearly, there is some statistical significance here.

Given the above analysis, we would be hesitant getting too bullish over Apple’s stock price potential in the near term as the call buying already seems to be reflected in the price. If you own shares of the second largest company in the country by market cap, we would be trimming back our position right now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Limited Upside For Apple Ahead Of Earnings