So Apple (AAPL) is off by 6%. Measured from its May 2012 peak it is down an even more surprising 13%. Surprising because of the bullishness and confidence embedded in this company. However, this recent selloff might prove to be very good for the markets and maybe even for Apple going forward. Here are some reasons:
- There was a lot of capital just passively sitting in Apple's stock. As the stock proves not to be infallible as many Apple investors have believed, some of that capital will leave and disperse into other sectors. A sustainable market rally should be based on capital equally dispersed through different sectors. When one stock just keeps going higher, it actually doesn't bode well for the markets. It sucks in capital that would have otherwise gone into other stocks with similar fundamentals. As a result, investors who are just speculators and follow the herd without knowing what they are really doing start to overtake real investors who put real work into their investment research. That kind of a market just lays the ground for a severe correction when the sentiment turns. The other thing is that the markets fail in dispersing capital to the companies that deserve it most. Investors decide that it is not worth doing the work of analyzing hundreds of stocks and choosing the best. As the same stock seemingly always over performs, investors decide that what works is just putting money into that one stock and leaving it. That turns many investors into pure speculators and destabilizes the market. Apple's rise to $650 had all these characteristics and has affected the market as described. So it might be reasonable to suggest that a reminder about Apple's possible downside might actually bring stability to the markets.
- Apple had become rather complacent about its stagnation in its North American market. It has depended on Chinese growth to make up for it. While it's understandable that the company wants to put much of its effort into the growing Chinese market, I am not sure it is good for the company to ignore the slowing down in its home market. I have written extensively on this topic (Will Apple Stock Remain Stagnant?) and have been proven quite right in that respect. I have also suggested in that same article, in order to avoid the Apple specific stagnation risk, it would be better to trade Apple through a broader ETF such as QQQ. I am not sure there is much Apple can do about this stagnation phenomenon, as part of the problem stems from Apple's market share being considerably high in the North American market. However, the recent sell-off proves the problems are real and are starting to affect the fundamentals.
- Apple is still a very good company, if not one of the best. The sell-off might prove to be a good opportunity to build some long positions in Apple's stock for the medium term. The problems I have mentioned above are definitely not a suggestion to short the stock. If the recent sell-off establishes a consolidation pattern for Apple's stock, another rally might start and be very good for the stock indeed.
- The capital that has left Apple will probably move into other sectors rather than driving down the market sentiment with it. Barring any surprise developments from the Eurozone, I expect the market (QQQ) to actually improve based on this Apple sell-off. As Apple is not the sure trade as it was anymore, investors will be keener to put money into other large cap stocks with a similar bullish sentiment that Apple used to have. In my opinion, the oversold stocks and some cloud stocks could be the ones which benefit. Morgan Stanley (MS), Green Mountain Coffee Roasters (GMCR), NetApp (NTAP), RedHat (RHT) and Salesforce.com (CRM) might be worth considering. I have explained the reason why the above mentioned stocks could benefit from a stable market sentiment in some of my previous articles. (Trades For The Approaching Euro Strength, How To Profit From The Last Stage Of The Cloud Bubble)
- This selloff should weed out the extremely leveraged speculators, as they deal with margin calls, and make room for more stable investors in Apple's stock. This is another good effect that might be positive in the medium term. However it should be noted that the stock will be volatile for a while until this investor conversion is complete. It might not be wise getting into initial rallies before the stock settles down a little.
My earlier suggestion was to pair a long QQQ position with an Apple short to be hedged against any Apple specific risks. That has proved to be an incredibly accurate prediction after this sell-off. After Apple stock settles, there will probably be some good option trades to be made and I will try to post an article about those possible trades. Investors who find my analysis and trading suggestions of good quality can use the "Follow" feature of SA to get that article. For the short term, the long QQQ hedged with a short Apple trade is still a nice and can be profitable. It gives the investors exposure to an improvement in market sentiment as well as any rally in Apple itself, without exposure to the volatility that will ensue in Apple. I should also mention that 6% sell-off is not enough to lure the buyers in yet given the slowdown that is starting to happen in the company. There might be a much larger downside, probably close to 15% before the stock starts to consolidate.