The recent run up in shares of Apple (NASDAQ:AAPL) has some cheering and others looking worryingly at the exits. I've been fortunate to buy in very close to the bottom of many companies' shares, and cautious enough to sell close to historical highs or interim high points in several companies. Since the beginning of this year, I have been taking profits on various holdings leading up to trouble dates anticipated for Greek debt. While the Greek saga is definitely not over, there is less expectation of a near-term shock to global markets.
So the idea is not that Apple shares will fall due to internal issues, rather that AAPL is not immune to a market correction. If Greek elections (late April or early May) bring in a new group wanting to renegotiate bail-out terms, the IMF has already indicated they would withhold funding distributions to Greece. This would once again rattle global markets and could prompt a flight to safety and a sell-off.
Great article here highlighting some oddities in recent money flows. Usually if stock markets go up, we see bond markets go down. There was a move downward in Treasuries, but the data behind this suggests that it was an unwinding of a carry trade. Without a more substantial real move in Treasuries, this rally is no bull market. We are barely at the October high point in bonds and far off early 2011 levels. AAPL has led most large caps in the market run-up, and almost appears to be propping up the Nasdaq.
I follow port traffic and ship movements around the world as part of my work. Recently there has been a slowdown of activity at some ports, the port of Los Angeles being a significant one to watch. Most of the worlds products and raw materials spend part of their life on a ship in transit from one part of the world to another, so changes in ship traffic patterns are forward looking.
The glut of available ships has allot to do with shipping rates, though I have watched traffic overall decline in many parts of the world, especially Asia, though not as severely as in 2009. This suggests a slowdown in global economies, with a corresponding pull-back in global markets this summer. Ship traffic is my main leading indicator.
The other macro factor has been Operation Twist from the Federal Reserve, which has placed excess funds into financial markets. Previous QE operations fuelled a bubble in commodities just a year ago. Once Operation Twist ends in a few months, just in time for summer, we will see a decline in funds, implying a decline in markets, rather than a sharp correction. There may be a liquidity crunch after Operation Twist ends.
Volume in AAPL shares went noticeably above average last week, while overall market volumes were barely average in many large caps, and below average to light in mid caps and small caps. Much of the volume increase in AAPL was due to heavy activity in options. Quite often options plays are not held to expiration, and profit taking can occur well before expiration, while others will expire worthless. Very simply, an option which conveys the right to buy something at a specific price is called a call; an option which conveys the right to sell something at a specific price is called a put. So one of the things I look at, even though I don't play options, is the options volume at various strike prices.
There are numerous option plays currently for AAPL. One curious event that happened last week, just prior to the huge AAPL options volume, was the release of bank stress tests by the Federal Reserve. Many banks passed quite easily, which relieved some pressure on them. We can look at the FT Alphaville article above about carry trade unwinds and bonds to see another result of this.
The other curiosity is out of the money long dated puts volume, and a spate of recent higher AAPL price targets. I don't think it is a coincidence. Many decry analysts ratings as self serving, though when the analysts ratings go their way, they suddenly seem to agree with the analysts.
I recently commented that Apple seemed more like a cult, with many seeming to worship the company. The heavy volume in AAPL with lack of volume in many other stocks looks allot like the run-up in gold futures last summer, so in a way Apple is the new gold.
I'm typing this on a MacBook Pro, though I think Apple can no longer be called a computer company. Apple iPhone sales are the main revenue source, and iPad sales are likely to provide greater revenues over time, as more people shift towards tablets. The tablet market does not yet exist, as it is now mostly an iPad market, but Apple created this perceived need for tablets, which were an extreme niche product not long ago. This winter we are likely to see many more tablets on the market, and by mid 2013 I would expect a growing tablet market. Gartner Group and others predict growing volumes through 2015 in tablet sales world-wide, with Apple still commanding nearly half the market.
We can see now at new Apple product launches the lines form to get the newest, and some research suggests that Apple product sales are heaviest at launch and taper off in the life-cycle of the product. This suggests a need for instant gratification amongst many buyers. The risk in that type of buyer is that when the newness wears off, they become less enamoured of their purchase. Buying apps may be a way to maintain enthusiasm, though it seems not too many months after each new Apple product, there is a great deal of chatter awaiting the next product.
Jonathon Ive might be able to keep churning out new designs, but it remains to be seen if Tim Cook will be able to identify new technologies that will keep those lines forming. We know iPhones will move towards 4G and may have larger screens, and a next iPad will likely have a fully functioning Siri feature, but beyond design what will keep the lines forming at Apple Stores in 2 or more years? There is also rumour of a smaller iPad, which might attract some people away from competitors smaller tablets, but only if the price is not too high.
We already know Microsoft (NASDAQ:MSFT) is working on Windows 8 for tablets, with several companies expressing interest in producing Windows 8 based tablets. If we look at the recent purchase of Skype by Microsoft, we can see one killer app that would attract people to the platform. The possibility of adding MSOffice to a tablet might also be a killer app package that attracts many new users. Windows is still the overall largest operating system installed user base.
This great chart from The Economist shows operating systems in use:
We can see the growth of Android and iPad/iPhone. Again using Gartner Group and others predictions, we are not yet in a mature market in smartphones nor tablets. I still think the Apple iPad will remain the premium priced tablet with largest volume sales, but other offerings will gain significant volume through 2013 as new users adopt tablets. While repeat sales are good, the real need to keep earnings and revenue increases moving are sales to new customers.
How Apple attracts new customers is still more important than retaining customers, though in a very long run retention will provide stable revenues. Nothing wrong with stable revenues, but the recent run-up in AAPL looks much more like what we see in start-ups and heavy growth companies, and not like what we see in mature companies.
Those who look at technical indications like over-bought or over-sold, will also see that technically AAPL has been indicating oversold since late January. One aspect of this may be a reluctance to sell, and there has been some unbalance of buy and sell orders. Historically we have Qualcomm (NASDAQ:QCOM) and Microsoft to look at for similar patterns driven by a reluctance of shareholder to sell, creating a limited available supply of shares, though that alone should not cause someone to worry.
Those holding AAPL might wonder about an interim top or taking some profits. The idea, for those who still like the company, would be to take some profit, then find a place to buy back into AAPL. So if we use the idea of a market pull-back, sell-off, or correction, then we can look for a target price. We can look at options volume, and previous chart history percentage moves for target price points.
Looking at any place where RSI has been under 40 we see a possible floor in AAPL shares at 355.00. If we looked at pull-backs more as percentage moves, and assuming a market correction, we might use 480.00 as a floor, which would be more optimistic. The 50dma may be another target some might find useful, though that would be in the 490.00 to 500.00 range. I've looked at correlations of market declines matching AAPL declines to figure out these targets, with the expectation that prior movements would be repeated.
I don't think the drop of 2009 is likely to be repeated, so I used each drop interval in 2010 and 2011. It may be worth recalculating based upon Nasdaq rather than S&P 500, though I tend to use the S&P 500 figures more often due to the greater volume of trades. If we look at longer dated options plays for these targets, we can find others who think these are possible targets. Shorting is highly risky, and I don't recommend doing that.
Some might think I place too much emphasis upon RSI, but this is a great quick indicator of momentum. Currently the trades and run-up in AAPL look like momentum trades, with the idea that what goes up will continue going up. RSI is often a leading indicator, and we can expect a high RSI to be slightly ahead of a high point in shares, while a bottoming of RSI can be expected to be before a bottom in share prices.
My expectation is that AAPL would not be immune from a market sell-off, which we can confirm by watching RSI in SPY, which is a heavily traded ETF for the S&P 500, though watching QQQ would be another great indicator. QQQ is still showing overbought as I write this article. QQQ is very heavily weighted in AAPL shares. Here is an article explaining RSI.
If the overall economy eventually recovers, then we may see more normal markets. Black Swan events, like a war against Iran, coup in China, troubles after Greek elections in a couple months, or large natural disasters interrupting supply chains, might derail or delay a return to normal markets. My belief is that global economies have a ways to go, and we will not see substantial and real improvement until mid 2014.
So I find these investing times to be great times to build positions, like one company I bought into in 2009 that is up over 650% and still growing. Towards 2014 AAPL may push ever higher, but not without some pull-backs along the way. AAPL in normal markets should provide consistent revenues, if they continue to release products that retain past users and attract new users.
If you do not think the stock markets will drop, or think that AAPL shares are immune to moving downwards with the overall market, then feel free to disagree with me, but please state your reasoning in the comments.
Disclosure: I am indirectly holding AAPL shares through a fund; awaiting market correction and target purchase under $420.00 a share.