Apple Down 10% In 9 Days: Is It Time For Caution?

Apr.23.12 | About: Apple Inc. (AAPL)

Over the past nine days (ending April 20th, 2012) Apple (NASDAQ:AAPL) is down almost 10%. With an average nine-day return of 1.10%, since 1984, this has many investors wondering if this is a buying opportunity or a sign of worse to come.

Let's look at some of the historical data:

On any given trading day since 1984, Apple's stock price has experienced a similar or worse nine-day drop only 8.57% of the time. Clearly, this type of drop is infrequent and potentially significant.

The last three times Apple stock dropped more than 9.9% over nine days were August 8, 2011, July 5, 2010 and many occasions during the financial crash from 2008-2009. The average 30 day return after these drops was -3.99%. However, if one only looks at the 2011 and 2010 corrections the average 30 day post-correction rise was nearly 16%. Investors that bought the last two 9.9%+ nine-day corrections were handsomely rewarded, as Apple stock was in a strong up-trend.

The longer-term story is a bit different.

Looking at all the data back to 1984, the average 30 day return after a nine-day 9.9%+ slump was 1.48%. Compare this to the average 30 day return of 3.78%, a 231 basis point underperformance. For a 30 day period this is a material difference.

Even when excluding 9.9%+ nine-day drops that occurred during the 2008-2009 financial crisis, 2000-2002 tech wreck and 1987 crash the average 30 day post-slump return is still 94 basis points below the average 30 day return for all periods. Exclude the same market crashes when calculating the average 30 day return and the post-slump return underperforms by 206 basis points.

Given the historical data, one might conclude that the next 30 days for Apple stock may be below average. However, to rely solely on historical data would be a mistake. Current fundamental and technical factors must also be considered - after all, Apple has just experienced a mind-blowing rally and is due for a consolidation.

In my opinion, while the current 10% correction warrants caution, on its own the correction is not a clear signal of the end for Apple.

Data source: Yahoo! Finance

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