How To Profit From Apple's Next Big Selloff

| About: ProShares UltraPro (SPXU)

Apple (NASDAQ:AAPL) has been on a tear for the past four months and as astute investors know what goes up must come down. It is interesting that the mainstream financial press dares not speak negatively about Apple. Meanwhile, across the Pacific, Samsung is quietly picking up steam and Samsung Electronics (OTC:SSNLF) (005930.KS) share price has doubled from a year ago. Not only does Samsung profit from Apple whether Apple's share price is high or low due the components it makes for Apple devices, but Samsung is often favored by in the know techies in Asia over Apple.

Samsung has long been a leader in product design aesthetics and one might be amazed should one visit an electronics store in Korea. I recall back in 1999 on a visit to Korea being blown away by innovative products that left me scratching my head in wonderment until it finally dawned on me that US protectionist policies had been keeping Korean manufactured products out of reach of American consumers. I was pleased upon my return the following year to learn that Best Buy (NYSE:BBY) was starting to carry Samsung products. My Samsung fridge looks better than higher end models made by competitors, cost less than $600 at the time and is still going strong 14 years later. Same goes for my microwave. Western media bias is shielding investors from the big picture. Listening to the market barkers on CNBC, one would think everyone in the world with a cell phone will eventually buy an Apple product. Sorry fellas, this just ain't so. I also bought a Samsung phone a few years back as it was first to market with an 8 megapixel camera. I happened to pick up a Samsung Memoir a year or two later, a phone I believe is destined to become a classic due to its unique camera like design.

Now before you Apple fans take out your long knives, keep in mind that I have not stated Apple will not continue to grow and expand its market and become the first trillion dollar market cap stock with a share price of $10,659.99 per share. I am merely suggesting that for investors, there must be a few checks and balances in the conversation to perhaps wake one up to the fact that in the history of the western world, not one single product innovator has stayed on top forever. Xerox (XRK), Kodak, and the Ohio based Columbus Buggy Company come to mind here.

When products such as Apple's innovations drive investors into a fever pitch of stock buying, they often get blindsided by some unexpected game changing interruption and wake up one morning to find massive losses in their portfolios. Once again, I do not expect this to happen anytime soon to Apple. But I do expect to see a major correction coming in Apple's share price before it hits the $720 target recently assigned by Morgan Stanley. This is only common sense. Keep in mind that the bubble game in Apple's stock is now being played by major brokerage firms. We have seen all this before. Broker House A sets a new target this month only to be topped by Brokerage House B next month as they slowly ratchet up the bubble. Of course the argument this time around is that Apple has the earnings power to justify the targets. As a keen observer of human nature, I wonder just how many $700 devices consumer automatons are willing to buy before they wake up to realize device A is just as good as device B, C, and D. Eventually, you gotta put back some beer money, what?

So how can one prepare for this? My view is to buy shares of ProShares UltraPro Short S&P500 ETF (NYSEARCA:SPXU) which is an inverse triple leveraged ETF that is designed to move up three times the percentage of any given day's decline in the S & P 500 Index. According to the Wall Street Journal, Apple makes up over 10% of the S & P 500 Index's earnings power, and has accounted for 25% of the S & Ps tech sector earnings, facts that give us two reasons to consider the SPXU:

  1. Earnings are expected to be weaker in the first quarter of this year for S & P 500 companies overall when compared with the fourth quarter of last year. This could cause an overall market selloff that Apple will not be immune to.
  2. Should any negative news come out on Apple such as delays in parts, or an iPad catching fire from the battery overheating on teenage mutant gamer say…just kidding, the temperature only rises to 116 scorching degrees according to Consumer Reports...but you get my drift.

Although it is suggested by the genius mathematician fund designers that reverse leveraged ETFs should not be held for periods longer than a day and maybe a few days at the outside, I find it compelling at this particular time to build a position in the SPXU given Apple's heady gains of late, the uncertainty over the possibility of war in the Mideast and the upcoming earnings season shortfall potential. The SPXU is currently trading close to its all time low of $8.97. The S & P 500 targets of nearly all notable analysts have already been hit for the year, yet hardly a single analyst has revised their estimates upwards. I look for a fairly significant correction in the next few weeks to occur.

The strategy here would be to take the profits you make from gains in the SPXU to buy more Apple shares at a lower price. If you currently hold Apple shares, I would consider selling them at this time if you have a considerable profit locked in. If you recently bought at the top, don't panic and sell during the correction, as Apple will most likely regain its any losses during this next correction. There is simply too much momentum and hype behind this stock right now for it not to shoot to new heights down the road.

Caveat: This strategy is only for speculators. If you have to ask what a reverse leveraged ETF is, then this trade is not for you. Conservative investors should steer clear. If you wish to learn more about reverse leveraged ETFs, click here. And most certainly do not invest in the SPXU without first reading the fund's prospectus.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SPXU over the next 72 hours.

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