Short-Term Sell Signal On Apple

 |  About: Apple Inc. (AAPL)
by: Nigam Arora

Just before noon on Wednesday, when Apple (NASDAQ:AAPL) was trading over $525, our adaptive algorithms generated a short-term sell signal on Apple. Within minutes of issuing the signal to subscribers, I received more emails in disbelief than I have ever received on any one signal in the five year history of my alert services. The emails were logical because of our consistent bullish stance on Apple since first recommending it at $131. I was writing that Apple stock could go to $1000 long before Apple became a popular investment.

The algorithm that gave the short term sell signal is an adaptive algorithm, i.e., it changes automatically based on market conditions. Without bothering the readers with mathematical gobbledygook of the algorithm, in simple words the algorithm assigns different weights to different factors and changes those weights based on prevailing market conditions.

Astute investors can use the concept behind the algorithm in their own investing and trading without using any mathematical algorithm.

As an example, at present the algorithm is assigning zero weight to traditional fundamental criteria such as price earnings ratio, growth rate, price sales ratio, book value, etc. The reason is because the algorithm has determined, based on the trading history of Apple, that these factors are not correlated to the stock price.

An investor does not need the algorithm to determine that the traditional fundamental criteria is not correlated to Apple stock price. An investor interested in using the concept described here can simply ignore the traditional fundamental criteria.

My long term readers know that I have been advocating for years the way to make money in tech stocks is to understand shifts in technologies, product cycles, and demand ahead of the crowd. The algorithm implements the foregoing in mathematical terms.

In the case of Apple, the algorithm gave the highest weight to the evidence that novelty of Siri is beginning to wear off.

An investor can easily use this concept by figuring out the change before the crowd figures it out. In this case the change is that novelty of Siri is wearing off. For this reason, linearly extrapolating earnings and revenue numbers from the last quarter into future quarters will lead to wrong conclusions.

Interestingly most investors and analysts are oblivious to the fact that novelty of Siri is waning. A large number of investors and analysts are not even aware that the difference between analyst projections for iPhone 4s when it was introduced and much higher numbers that Apple reported is directly attributable to Siri. A hands-on investor could figure this out qualitatively but not quantitatively by simply spending some time at an Apple store, an AT&T (NYSE:T) store , a Verizon (NYSE:VZ) store and a Sprint (NYSE:S) store.

Siri was a novelty when iPhone 4S was introduced. Phenomenally strong sales were the result of the novelty of Siri as well as bouncing Samsung (OTC:SSNGY) as the world's largest smart phone maker. Samsung phones run on Google (NASDAQ:GOOG) Android. The thing about being a novelty is it wears off.

Most investors as well as most analysts are highly inductive, i.e., they think linearly contiguous to the present state. Because of high inductivity, most analysts are not taking into account the impact of Siri novelty wearing off in their estimates. Apple is followed by a large number of analysts and their collective high inductivity makes it difficult for them to change their estimates. Apple is followed by 55 analysts. The published earnings estimates of these analysts range from $33.24 to $46.40. The average of the published estimates is $42.60 for current year earnings.

The average published estimate for current year revenues is $165.89 billion.

The well-kept secret of Wall Street is that stocks do not trade on published numbers, but on whisper numbers. Salesmen entice clients by providing them with private information about earnings and revenue estimates. These numbers are known as whisper numbers.

By their nature, it is impossible to precisely know the whisper numbers. Our sources indicate that some whisper numbers for current year revenues are as high as $170 billion, and earnings estimates are over $50 per share.

Once the crowd starts understanding that novelty of Siri is beginning to wear off, whisper numbers will dramatically come down. According to the ZYX Change Method, there is 25% probability of Apple stock falling to $425.

The point of the article is that any astute investor willing to take time to figure out what factors that correlate to the stock price and willing to put in the effort to figure out change in such factors before the crowd can consistently call turning points without the help of math or algorithms. Math and algorithms simply make the task easier and efficient.

Disclosure: I am long AAPL.

Additional disclosure: We took partial profits on AAPL at $525.