Now that the downside threat of the WWDC keynote is past we can focus on the most exciting time of the year for Apple stock action. The aftermath of widely anticipated events like WWDC has not been good to Apple stock and typically results in a buying opportunity. On this particular occasion Apple dipped $17 from its intraday high on Monday but was able to finish +$5 on Tuesday. Some were disappointed that no iTV or iPad-mini was announced but in all reality the expectations for this event were low in comparison to past events and the stock was already $65 off its 52-week high. The strong action from Tuesday suggests there isn't much pressure to sell at current levels. We took the easy money off the table from the $40 pre-WWDC run up and now have 70% of the portfolio in cash. The big question is...when do we buy back in?
The stock is tracking closely with its 2011 trend. Last year investors were disappointed that WWDC didn't unveil an iPhone 5, they were worried about the health of Steve Jobs, and European contagion fears reached a mid-summer climax on June 20th when Apple hit its low of $310. This year investors are confident iPhone 5 and iPad Mini are coming in late September/early October, they are thrilled with the leadership of Tim Cook and European contagion fears are at a minimum following the $125 billion Spanish banking bailout. The uncertainty surrounding Greek elections on Sunday, June 17th still lingers over this market but the truth is that because of Greece's small size, the only reason investors have feared its debt collapse is because of the precedent it would set for larger euro zone nations like Spain and Italy. In the absence of this contagion fear, uncertainty in Greece doesn't carry as much weight as it did in 2011. The Spain bailout all but assures another Apple run; Apple stock will be the primary beneficiary of European stability just as it has for the last 10 euro solutions. For these fundamental reasons, the setup for an Apple July earnings run is even more appealing in 2012 than it was in 2011.
From a technical perspective, the 2011 run began at $310 on Monday, June 20th and finished up 30.3% at $404 on July 26th. Prior to this, Apple hadn't run since it hit $355 on April 21st which is similar to the 2012 stall out at $644 on April 10th. If we use 2011 as our guide, it suggests we be fully loaded in Apple calls by Monday, June 18th. Once the Greek elections are past, Apple will be completely free to run. The question is...will the hedge funds wait for the Greek elections or will they buy beforehand? To protect yourself, it makes sense to average in each day until Monday. At this juncture being in early is better than getting in late. If you would have waited until July 1, 2011 the stock was already up to $343. Current dips will be short lived.
What are the odds of a pre-earnings run? Consider that prior to the April earnings report Apple rallied from $516 on March 6th to $644 on April 10th. Prior to the January earnings report Apple rallied from $363 on November 25th to $431 on January 19th. Prior to the October report Apple rallied from $354 on October 4th (iPhone 4S disappointment) to $426 on October 17th. And as we've already mentioned, Apple rallied from $310 to $404 on July 26th. The pre-earnings run has become the top catalyst for Apple stock. Hedge funds do all they can to force a trading range bottom that allows them to ride the easy money slingshot into earnings. The current quarter is perfectly on schedule. Apple has become a stock that you want to own during these 'easy money' windows of opportunity when positive uncertainty is uninhibited by actual data.
As you know the July pre-earnings run is only the first stage of the remaining 2012 rally. Following a post earnings selloff and a subsequent August doldrum low, September is poised to be a month of Apple euphoria as investors anticipate iPhone 5 and iPad Mini. Last year's run off the August lows began at $355 on August 22nd and hit $422 on September 20th in anticipation of the iPhone release on October 4th. We want to make sure that the call options we own are able to benefit from the second run in case unforeseen economic variables derail the July pre-earnings run. October calls are the option of choice. By Monday, we plan to add a 30% allocation of the October options. It's buying time at EconomicTiming.com!
Disclosure: I am long AAPL.