Things That Could Send Apple Pulling Back To $500

Mar.13.12 | About: Apple Inc. (AAPL)

As many of you know already, I wrote an article a few weeks back stating that Apple (NASDAQ:AAPL) would see $500 again before it reached the $600 mark and beyond. I wrote this article not to bash the stock, but to make a point about the history of the company, and how to take advantage of such a pullback.

So far, there was a slight pullback that occurred but not to the level I expected it to (yet). Last Monday saw a severe drop in share price, and it proceeded downward again the next day. But over the next few days, it was onward and forward for the empire (as I now call them) and back to the $545 levels.

Although I am not conceding the point I made last week, the stock does seem to have gone through it's initial pullback unscathed. Many of you have commented how nuts I am with my theory and are ready to manufacture me into the first iPad3. Remember, I am WITH YOU on Apple being a long term home run, but I also (as you all should) like to make money whenever I can grab it.

I did purchase puts (of which 90% are sold already, holding onto the remaining 10% in case of a sharp drop in the coming days) for a 15% ROI in 2 weeks time with a "free ride" on the remaining shares. Even if they expire worthless, I did what I had to do; I made a double digit ROI in less than a month's time.

I am going to discuss a few potential pitfalls along the way that could bring Apple back to the $500 before it climbs (and hopefully surpasses) the $600 mark. I understand some of these are more likely to happen than others, but nonetheless I wanted to put them in as potential "land mines" for this stock that could cause another (deeper) pullback.
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(Click to enlarge)

History: Those of you that read my first article on the potential pullback will recognize this chart above. As you can see, Apple on 4 separate occasions in the last 12 months has had massive runs followed by double digit losses. I agree that Apple is becoming more and more of a monster and these pullbacks may be a thing of the past but history does tend to repeat itself, and even if this stock pulls back only 8-9% from current levels (instead of the 12% it was averaging in the other 4 occurrences) the price will hit $500 again.

Bureaucracy: What better way to stop this steamship from moving ahead than to let the government get involved? Rumors are floating that the good old Justice department will be investigating Apple and trying to determine if they violated any laws regarding a price fixing scam. The scam allegedly included 5 of the nations largest publishers regarding the pricing of E-Books. Think the government cannot derail a stock? Ask the Sirius (NASDAQ:SIRI) holders during the Sirius/XM merger how they feel about the "rain delay" they went through during it that almost buried the stock permanently.

Market Conditions: Keep in mind when thinking about the overall market. We are now entering our 4th bull year in row, after the nightmare that took place in 2008. The Dow is up nearly 22% in the last 6 months alone. Not only may Apple be due for a correction, so could the market as well. Also on a side note, Samsung recently filled (another) lawsuit against the empire, this time in Seoul regarding 3 patent issues and text messaging issues. They keep firing away at Apple, but all they need is one to stick to damage this company, at least in the short term.

Outside influence: Greece. Oil prices. Syria. Afghanistan. Iran. North Korea. What's the point? Wars, Oil (should be a 4 letter word if you get my drift) bailouts/credit issues all could contribute to a decrease in price for both Apple and the market in general. And of course there are thousands of other things that could happen in the world to effect the price, that we cannot even predict.

Pinch Hit Homerun: When you are on top of the world when it comes to product content (as I believe Apple is) you can only go one direction: down. They are at the top of the food chain with a large gap between everyone else. I would compare Apple's products to the competition like comparing a human being to maybe a field mouse.

HOWEVER, because of that, another company could come out with a game-changing item or items that could begin to compete with some of Apple's. Apple may still hold the "title" so to speak, but when you are on top, people will try and take their piece of your market. It is bound to happen, the only question is how much will they take and will it effect the price?

As an example what if tomorrow Microsoft (NASDAQ:MSFT) came out with a tablet that could do everything I-pads could, AND could run all the office software (excel, word etc) and flash for $599? Do you think that would take a bite out of I-pad sales?

I am still on board for the long term prospects for Apple, I see it reaching the $600-$650 level within the next 8-12 months, however I still believe the pullback to $500 is going to come first.

Disclosure: I am long SIRI.