George Dai's  Instablog

After topping at $705.07 on September 21, 2012, Apple Inc. (AAPL) stock began its long journey of down turn, touching $419 on March 3, down 40.4%. As it rebounded somewhat recently, people started to wonder whether it has bottomed or not. In this article, I am looking at 10 metrics (5 technical and 5 fundamental) to see if it is a good time to get in to Apple stocks.

1. Elliott Wave

Because of the significant price drop, we consider a 5-wave down wave from $705.07 set on September 21, 2012 to $419 set on March 3 a couple of weeks ago. The first down wave ended on November 15, 2012 at $525.62, lasting 55 days, with a 25% drop. The second wave was a rebound wave, ended on November 29 at $589.36, lasting 14 days. The third wave continued the drop, ended on January 25 at $439.88, lasting 57 days. The fourth wave was another rebound, ended on February 11 at $479.93, lasting 17 days. The final wave slipped to the bottom, ended on March 4 at $420.05, lasting 21 days. The completion of the 5-wave down waves indicates a bottom has formed, a positive sign.

2. Moving Averages

For moving averages, Apple (AAPL) currently is trading under all major moving averages (50-day, 100-day, and 200-day), as shown in the following chart, indicating extreme bearish. This is consistent with the Elliott wave findings, again, may be a positive sign.

(click to enlarge) Source: Yahoo Finance

3. Put/Call Ratio

Put/call ratio is often a good indicator whether investors become bullish or bearish on a stock. Following chart shows Apple's stock price alongside its put/call ratio in the last three months. It is clear that the ratio is close to the three-month low, again, a positive sign.

Source: Optionistics.com

4. Volume

For trading volume, there is a rather significant change in recent days as compared to the beginning of the down turn, especially for the down days. During the first couple of weeks after September 21, 2012, Apple (AAPL) traded on average 23.8 million shares per down day. In the past couple of weeks, the down-day volume decreases to only 16.7 million shares. On the other hand, the up-day volume has increased to over 20 million shares in the past few days. This again is a positive sign.

5. Correlation with Broader Market

Recently, the broader market has reached historical highs. Over the past year, especially the past 6-month when Apple (AAPL) is in its down turn, its share price has a significant negative correlation with the broader market. Over the past year, its correlations with SPY and IWM are -0.45 and -0.54, respectively. For the past 6-month, the corresponding correlations are even at -0.61 and -0.69, respectively. Even with QQQ where Apple is a significant component, the correlations are close to zero. If the market is at or near the top, a negative correlation is a positive sign.

6. P/E

From the fundamental viewpoint, I list the five metrics that I consider most relevant for Apple Inc. (AAPL): P/E, dividend yield, PEG, P/CF, and net profit margin. For fair comparison, I list these metrics for Apple as it compares to the top 10 stocks with the largest market cap in the following table.

5 Fundamental Metrics for the Top 10 Stocks with Largest Market Cap

Source data: Yahoo Finance

Apparently, Apple's P/E is nearly at the bottom, with only the two oil companies Exxon Mobil (XOM) and Chevron (CVX) with lower P/E ratios. Therefore, from P/E ratio, Apple appears to be under-valued. Hence, it is a positive sign.

7. Dividend Yield

Among these biggest companies, Apple is yielding a reasonably good return for investors, especially considering the three other tech companies Google (GOOG), Microsoft (MSFT), and IBM (IBM). With the largest cash reserve among these biggest companies, there is considerable potential for the yield to increase. I also consider this as a positive sign.

8. PEG

For PEG, Apple is clearly at the very bottom. As a matter of fact, if the growth rate is only half of the current expectation, Apple still has the lowest PEG among these companies. Therefore, it is a positive sign.

9. P/CF

For price to cash flow ratio, again, Apple is among the lowest. The fact that Apple is generating more and more cash will only make this ratio lower, if the stock price does not increase significantly in the near future. So this is a positive sign.

10. Net Margin

For the net profit margin, again, Apple is clearly the leader. Although there are concerns for the profit margin to drop when Apple introduces low cost phones in the future in order to compete in the developing markets, it is nothing that can affect the profit margin significantly. Therefore, this is also a positive sign.

In conclusion, after the recent sell-off, Apple is ripe for a significant rebound, based on the analysis of five technical metrics and five fundamental metrics.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

With the Dow continuously breaking new historical records and S&P 500 very close to the historical record, people start to wonder whether we are ready for a serious pullback. While it may not be a bad idea to pile up some cash, it could be better to put the cash to work with some municipal bond close end funds (CEFs), after the recent sell off. Some of the Muni CEFs are now yielding over 6%. For those who live in California, the tax equivalent yield may be about 10%, which is great if a market correction materializes.

In the past few years, I have invested in most of the CA Muni CEFs with satisfactory returns. Among these couple of dozens CEFs, I like PCK the best, because it yields for me between 7% and 9%, besides the share price increase from about $8 to $11. Even after more than 5% drop from the recent high, it is still up about 10% from the 52-week low, and still yields over 7% at last Friday close. For value investors, however, there are quite a few that are becoming very attractive.

Because the close-end funds trade like a stock, the associated share prices may be higher or lower than their corresponding net asset values (NAVs), therefore the share are traded with a premium or discount, respectively. During the 2008/2009 market crush, all of the muni CEFs were traded at a big discount, creating a huge opportunity for value investors to receive tax-free dividends at astonishing high rates. I often consider the change in the premium and discount of the CEFs just like a pendulum swing. When it goes either way too far, it has to come back because at the end it has to converge to the NAV. With the recent selloff, most of the CA Muni CEFs are selling at discount, with some at or close to the maximum discount in a year. Following table lists the current premium/discount of the CEFs that I follow as compared to the 1Y, 3Y, and 5Y statistics.

[Source data from Yahoo Finance]

Apart from PCK, other tickers that has strong performance and resistance to drop include CEV, PZC, and NUC. But I would rather pick those that are down the most, like NCO, NCP, NQC, NKX, and EVM, with more than 3 standard deviation below the one year average (essentially at the most discount in one year).

For selection purpose, I also like to see the current yield and historical total return. Following table describes the current yield, the Morning star rating, the most current three-month, one year, and five-year total return.

[Data from Morningstar.com]

From this table, most of these CEFs are now yielding about or over 6%. For California investors at 33% marginal tax bracket, the effective yield is 10.4%. This is a respectful rate of return, especially at a stock market correction phase.

In conclusion, selective California Muni CEFs may provide good returns after the recent selloff. They may be used to hedge your portfolio if the stock market starts to correct in the near future.

Disclosure: I am long BFZ, MYC, MCA, NVC, NZH, NVX, NUC, NKX.