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Bret Kenwell
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I seek out companies that have the ability to generate above-average growth for many years, before ultimately becoming a shareholder-friendly, dividend paying titan, cementing its spot in my portfolio with an incredibly low cost basis due to the previous years of steady, strong growth. These are... More
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  • Apple: Short Term Turmoil Lies Ahead 6 comments
    Mar 26, 2012 10:39 AM | about stocks: AAPL

    After nearly two months Apple's (NASDAQ:AAPL) parabolic run is over, or at least taking a break. On January 24th, Apple blew away Wall Street with huge numbers on a blowout quarter, and shareholders have been rewarded ever since. Until recently, Apple has rarely had a stumble, adding billions to their market cap daily, and at times propping up the Nasdaq (NASDAQ:QQQ) and S&P 500 (NYSEARCA:SPY). In fact, the tech titan hardly declined this week and was essentially unchanged by Friday's close. On Monday Apple opened at $598.37 and on Friday closed at $596.05, for a whopping $2.32 decline, or .38%. However,this historic run that Apple is compiling is beginning to run out of steam, and momentum is quickly fading.

    Last Monday, March 19th, Apple declared a quarterly dividend, as well as a share buyback program. Personally, I think this was a good use of their nearly $100 billion cash hoard, one that will likely amass the same amount in the next fiscal year. While many may disagree with this move, I think that it will bring stability from buy-and-hold investors, as well as income based hedge funds looking to add this behemoth company to their portfolio. After this news release, Apple was able to make the push above the $600 mark and hold it for most of the week, before selling off on Friday. But a few things were obvious last week, mainly that Apple needed a rest. It has become clear that, while there certainly may not be many bears, the punch that all the bulls have been drinking is drying up. Twice this week we saw "flash crashes" in Apple's stock price, the latest one occurring on Friday when a 100 share trade took place at $540, or down 9% from where it was previously. Quickly after the trade, the stock was halted until trading promptly resumed near $600, and trading remained normal for the rest of the day. Below are two charts showing Apple's price action over three and six month periods.

    Above: Apple 3 month chart (click to enlarge)

    Above: Apple 6 month chart (click to enlarge)

    On both charts it is quite evident that Apple has had an unsustainable run. It would be nice to pretend and imagine that they can stay here forever and continue this beloved run, while investors watch starry-eyed and drooling. However it is simply not possible, every stock comes down, and Apple is no exception. Though the RSI (relative strength index), a measurement that shows oversold and overbought levels, is not screaming out that Apple is severely overbought, but a reading of 77, does suggest an overbought condition. Also, a glance at the 50-day simple moving average, which is currently $504.94, nearly $100 below current share prices, would suggest a pullback is near. Another reading, the 200-day simple moving average is all the way down at $412, far below Apple's current stock price, and even more reason that this stock is due for a rest, and dare I say, a decline.

    Yes, they have an amazing balance sheet. Yes, they have amazing and innovative products. Yes, they still have a profoundly low PE ratio. Now, I don't want to shock anyone here, but it has to come down! I'm not saying Apple is going to trade into the single digits, or that it will go bankrupt tomorrow. In fact, I'm not even an Apple bear, I just think that in order to sustain this long term run, a healthy decline is certainly warranted. I think Apple has great prospects, but it has become clear, many bulls are becoming leery of buying into these levels. Without seeing the frenzied buying we have become accustomed to the previous eight weeks, it would suggest that the bulls are taking profits and a breather, while the bears loom close by, waiting for their opportunity. Could Apple keep running on its way to $650? Absolutely. But it will only make it more likely that Apple comes down harder and faster than it would now.

    I think a pullback to the $550 range would be adequate, though a steeper fall is certainly not out of the cards. When you start hearing people talk about buying shares at cocktail parties, it's usually a sign that the end is near, at least for now. Bearish technicians are starting to claim $610 as a top, and failing to close above $600 amid Friday's slight sell-off could be suggesting a pullback is destined sooner, rather than later. I would anticipate this and am not a buyer near these levels. Should short term selling pressure mount in a substantial manner, I will likely use weekly puts to take advantage of this inevitable fall.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in AAPL over the next 72 hours.

    Stocks: AAPL
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Comments (6)
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  • trudem1919
    , contributor
    Comments (27) | Send Message
    Apple may fall to 550. So what! If this is the big vaunted pullback that you fear so much, again I say so what? The stock will bounce back fairly quickly with any positive news. Any earnings beat will take the stock further than the previous high because investors know the PE is low; the PEG is excellent and many catalyst lie ahead. Spikes to the downside is not a newsflash given its short interest ratio and parabolic rise. The point is the rate, speed and resiliency of its stock price recovery, which will remain equally strong over the next 10 to 15 months.
    27 Mar 2012, 02:06 AM Reply Like
  • Bret Kenwell
    , contributor
    Comments (983) | Send Message
    Author’s reply » Trudem,


    Fall I fear so much? I respectfully think you're misconstruing my point. I would only fear such a fall if I was long the stock, and even then "fear" would be a stretch. In my disclosure I stated I would possibly initiate a short position if the stock loses strength and begins to fall. In fact, I would love for Apple to fall. Fall as far as it possibly can, I'm a better bull than bear, but not strictly one or the other. If Apple would fall (and when it eventually does, as all stocks do) I would LOVE to pick some up at a discount. Apple is a great company and I can only hope its share price declines.
    27 Mar 2012, 08:24 AM Reply Like
  • Outsider22
    , contributor
    Comments (1170) | Send Message
    "When you start hearing people talk about buying shares at cocktail parties"


    Im not sure you have left your house to even have a drink in a year but discussions about Apple at the Country Club or bar have existed for greater then a year. I remember a very heated discussion last july about Apple (I owned and someone else didn't). I stated that if someone considers themself an investor and they did NOT own Apple then, maybe they should consider letting someone else do their investment for them since only an idiot would not have own shares of Apple last year. This did assume a person bought individual company shares.


    Lets just say Apple has been talked about at the water cooler for a LONG TIME.


    The only thing that matters in investing is the fundamentals. Do you see any changes in the growth patterns of their products? Please show me why the stock will not have double digit gains over the next several years. Also Please show me how making another $100Billion a year is bad thing for a share holder.
    27 Mar 2012, 09:51 AM Reply Like
  • Outsider22
    , contributor
    Comments (1170) | Send Message
    "However,this historic run that Apple is compiling is beginning to run out of steam, and momentum is quickly fading."

  did it move from yesterday afternoon up to now??


    Is there a blogger on SA or anywhere else that has an opinion that is remotely correct even 40% of the time?? Why even post any thought when you are wrong?? Its something I never understand, In my field I have to be right > 90% of the time or I do not make $$$ but somehow so called "investment specialists" can create articles online day after day but be right only a small percentage of time.


    I would hate to even post opinion that is in-correct but that is just me ;)
    27 Mar 2012, 09:56 AM Reply Like
  • Bret Kenwell
    , contributor
    Comments (983) | Send Message
    Author’s reply » outsider,


    I never criticized Apple on a fundamental basis. In fact, if you read my comment above I would love for Apple to go down, so I could buy some shares. I'm not long, nor short, and yes technicals do matter. Maybe they're not as important to long term investors where fundamentals are very important, but for short term move technicals play a big factor.


    There are many ways to make money in the stock market, and it is a very logical thought that a parabolic stock will pull back after such a fascinating run such as this one, regardless of the fundamentals. I'm not claiming this is the all time top for Apple, or that it will be crushed. ONLY saying a pullback is necessary for a healthy continued uptrend.
    27 Mar 2012, 10:10 AM Reply Like
  • Bret Kenwell
    , contributor
    Comments (983) | Send Message
    Author’s reply » I originally anticipated a fall down to $550, and perhaps further, as stated above. Currently AAPL is trading 535 a share. With a high around 640, it is trading nearly 100 off the highs. I am not promoting or gloating, or anything of the sort.


    Just simply coming back on here to say, here, at these levels, with AAPL and the S&P beaten the way it is, I think a starter position in AAPL is warranted. Perhaps half of your intended position. With another quarter of your intended position to be added at 500, should AAPL reach that low. Should the markets completely fall apart, I would also add near 200-day sma, just about 450.


    Good luck to all in, or looking to get into AAPL, and happy trading.
    17 May 2012, 12:57 PM Reply Like
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