Apple's (NASDAQ:AAPL) stock has had quite the year. At one point up, it was nearly 75%, and now it's up a little under 60% for the year, it is clearly crushing the returns of the S&P 500 (NYSEARCA:SPY) and the Nasdaq 100 (NASDAQ:QQQ). Despite this, at the moment, Apple's stock is not a "Buy." Here is why:
There are times when investors should avoid purchasing a stock, not because of fundamental problems with the company's business, but because basic technical analysis shows the risk-reward does not currently justify a purchase. This is now the case with Apple.
At the moment, Apple's stock is trading in no man's land. It recently broke below its 50-day simple moving average, just a few days after the moving average acted as support on October 2. On two occasions in the past two weeks, the stock also failed to break above its 10-day simple moving average, which is now acting as resistance. On September 25 and October 4, the stock was stopped dead in its tracks by that moving average.
I maintain that the stock, now trading below the 10-day and 50-day moving averages but above its 200-day simple moving average, is in no man's land. Since April 9, 2009, the date on which Apple first broke above its 200-day moving average after the end of the equity bear market, that moving average has acted like a magnet for the stock on several occasions. April 14 and 15 of 2009 were the first two occasions the stock revisited support at the 200-day moving average. During the "Flash Crash" of May 6, 2010, the stock found support at the 200-day moving average. In August 2010, Apple once again approached the 200-day moving average, getting within a few dollars of it before investors jumped in. In June 2011, the 200-day moving average was breached for a few days but ultimately held strong, with the stock quickly recovering above that level. On October 4, 2011 and November 25, 2011, the 200-day moving average again acted as firm support for Apple's stock.
Thereafter, the stock began its meteoric ascent to $705.07, pulling firmly away from the moving average that has represented a massive buying opportunity for investors on so many occasions. It has now been more than 10 months since Apple revisited the all-important 200-day moving average. At the moment, that moving average is sitting right around $573 per share. It is only a matter of time before Apple's stock eventually tests the 200-day moving average again. The question is simply whether that meeting will occur at prices higher than today's, or whether Apple will have to go lower for the retest to happen.
With the stock now below the two shorter-term moving averages mentioned above, but still more than 10% above the 200-day moving average, I think it makes sense to do absolutely nothing with respect to buying or selling the stock. As long as the stock is trading below the aforementioned shorter-term moving averages but well-above the 200-day moving average, investors should be on hold and patiently waiting for the next opportunity to put money to work in Apple.
For those professional investors who may be trailing the major market indices this year and are buying every dip in Apple in order to try to catch up, consider doing the following instead:
Take a look at the December 22, 2012 expiring in-the-money put options, specifically the $670, $675, and $680 strike prices. Those three strike prices are currently bidding $56.70, $59.95, and $63.20, respectively. If you sold those strike prices instead of purchasing the stock at its current $638.17 level, you would have upside exposure in the stock equal to the premiums collected. And those premiums, when added to the current stock price of $638.17, get you pretty close to Apple's all-time high of just above $700 per share. If you aren't worried about the stock breaking out to new all-time highs before the end of the year, but need to play catch-up in your portfolio, selling the put options will allow you to capture plenty of upside.
Of course, by selling those in-the-money puts, you have the chance of being assigned the shares. But if you were planning to purchase the stock at today's level anyway, selling the aforementioned puts will help you realize a lower cost basis in the event of an assignment while still providing decent upside exposure. For portfolio managers already underperforming the broader indices, minimizing the potential for further underperformance in Q4 will be as important as playing catch-up. Selling the previously mentioned in-the-money puts on Apple should provide a happy medium.