Apple Stalls, but Shorting Is Risky

Apple (AAPL) took it on the chin early in the session Wednesday, dragged down by the continued fallout from the sub-prime lending crisis. It’s ironic that the very company that raised guidance on Apple, was also one of the catalyst for the market’s decline, posting a 2nd-quarter profit drop of 61 percent. On the flip side, Morgan Stanley’s (MS) Kathryn Huberty reiterated her overweight rating on AAPL and raised her price target to $210 from $185.

But the upgrade had no affect on AAPL, as it declined in whipsaw fashion to end the session down 1.48%, and like many other stocks, it dropped another 0.16% in after hours.

AAPL did manage to show good resistance to the decline of all the major indices. The market gapped down on the Morgan Stanley report, and was pushed down further with poor delivery from the nation’s largest package deliverer, Federal Express (FDX). The numbers weren’t so bad, as revenues actually increased. What really hurt was the outlook, with earnings projections well below expectations, due largely to rising fuel costs. This will undoubtedly hike shipping costs for your new MacBook Pro from your favorite online retailer, and make you wonder if you should have just driven to your friendly neighborhood Best Buy (BBY) or Apple Store.

AAPL and the Naz both lost their respective 50-day moving averages. AAPL's was 179.25 and the Nasdaq's was 2433, and both ended the session just a hair below. I had told my investor group to watch the Naz level closely, because it marks important support for the index, but yesterdays’ ending was not low enough to cause worry. From the contrarians' corner, the Bull-Bear ratio is inverted, which favors the future for a bullish reversal.

Tuesday morning I felt strongly that AAPL would be a good candidate for a day trade short but unfortunately, it didn’t work out mostly due to a positive report from analyst Gene Munster. But if you held that short position over till yesterday, you would have profited nicely. I wouldn’t recommend shorts going forward, especially considering the inverted Bull-Bear ratio, as that could easily come back to bite your apple.

I’m still bullish on the markets for the long term, with sentiment in the tank, an inverted Bull-Bear, and financials in the garbage heap. These are the perfect stew for a reversal. All we need now is for some positive divergences to set up in the 15 and 60 minute charts. In the meantime, it’s best to continue to play light. When the divergences reveal themselves, we’ll attack for maximum profits.

As far as AAPL goes, things are looking brighter coming off that strong bullish hammer the other day. Taking positions between 175 and 179, with a stop at 172 will provide good risk:reward propositions, as I believe AAPL will work its way up to a target of 189 by the time the 3G iPhone arrives. At that time, 'sell the news' will likely be the strategy.

Comments

[wallawallabingbang]

Apple is not a day traders 'playstock'.

Those who have been sagacious enough to hold over the years have made very high returns, the protestations of Cramer notwithstanding.

Recent, and unfounded, health-related smears against Jobs by shorts and hedgefunds, and ill-advised 'sell the news' calls by master manipluators (again, Cramer, et al) have created a transitory dip and buying opportunities.

Apple is America's best tech story. Treat the stock, the company, and its leadership with due respect.

[Toni]

So this one was not "astute" ?

[wallawallabingbang]

Toni, I'll let the others judge your intentions and analysis:

seekingalpha.com/user/...

[jmmx]

@ walla..

Hey man - I am all with you for long term investing. And I certainly get ticked off at the Apple bashing (esp Cramer repeating that "Apple Snobs" video day after day).

But, my friend, this is the big world and Apple is not set off only for the "serious" investor. My opinion is just not to worry. In the long run Apple's numbers will rule the day, and the nay-sayers will be proven fools.

Those who short into the dips will have made money - and so will you.

IMHO

[LongAAPL]

Those that make short term pennies look real foolish to those us that bought and held aapl in the last 5-10 years.

Go long aapl, yoou won't be disappointed.

[jmmx]

As for Apple itself...

It seems to me that investors are taking a "wait and see" attitude on the iPhone release. This is not really a bad idea if you are not an "Apple faithful" type. (NO disparagement intended here!)

It represents a big change in the game plan, and some people want to see how it flies before coming in. Fine by me. Like I said, when the numbers are out - well the numbers will be out. And at that point, no one will be able to argue with them.

[Bob'29]

The combined effect of all of Apple's facets produces a compelling reason for its stock price to increase both in the long and in the short term. From another blog somewhere in the universe:
"After some quick rounding and arithmatic estimates; It will take about 13.6 million movie rentals/sales per month for the movie division of iTunes to add an additional one billion dollars to Apple revenue in one year. I arrived at this with a ratio of 3 rentals to every movie sale. This ratio may be tilted toward the sale side as rentals do outnumber sales. Currently it would take 83.4 million sales of iTune songs per month to produce a billion dollars per year in revenue . iTunes songs has now accomplished this five times over (5 billion sold). The current monthly movie rental/sale number is now 1.5 million. I don’t think it will take a whole long time before iTunes movies add another annual billion in revenue to Apple’s numbers. Apple’s close relationship with Disney will positively effect Apple’s bottom line, an aspect of Apple that most analysts have overlooked."

[PK de C'ville]

@jmmx

"It seems to me that investors are taking a "wait and see" attitude on the iPhone release. This is not really a bad idea if you are not an "Apple faithful" type."

If you google "iPhone" with: 3G, 2.0. SDK, GPS, Exchange, you'll know TODAY what will be true in the next 3 years.

The iPhone(s) will dominate SmartPhones. Why? Because all the others are only phones while the iPhone is a pocket computer platform capable of supporting extreme levels of security, application development, usability, functionality, internet access, and reliability.

Want to make over $1000/hr? Do the research and invest in the coming dominance of iPhone 2.0/3G...

A good pocket computer will kill any ordinary "smartphone"...

[vitaminc]

All investments have inherent risks above treasury and long/short Apple isn't any different.

Apple is a long term story, but that doesn't prevent the stock from short-term dips. All the fan-fare build into the expectations of Apple makes it a very good short target.

Shorted Apple two weeks ahead of MacWorld at around $190. Everything regarding iPhone 3G, besides the $199 price tag, was expected from the blogsphere and firmware hacking group, it could only surprise on the downside. And it did. Covered two week after when the stock drop below $170. Made a quick 10%+ in a week and half. :)

Probably I will short it again into earnings if it go above $195-$200. 2Q results will very likely to be ugly with iPhone sales completely stalled and iPhone 3G eating into the iPod market. Computers are not going to be doing well either given Foxconn's comment on a soft 2Q/3Q orders.

OP is right. Sell the news.