When the adulation for a stock turns universal, you better run a mile. That is what happened when the iPhone 5 was launched nearly a month ago, the greatest consumer product in history. Since then, the stock has been trading like grim death. Has Apple truly gone rotten?
I don't think so. The last several years shows us that periodically, Apple pulls back $100 for no other reason than profit taking. The PE multiple has just dropped from 11 to 10. Cash is still pouring into the company at the rate of $200 million a day or more.
We are already about $80 into this move down, so I am going to start scaling back into the long position that I stopped out of eight days ago. This is a bet that the multiple doesn't drop again from 10X to 9X for the world's best and most profitable company, having just fallen from 12.
After the launch of the long awaited iPhone5, the firm has been hit by the perfect storm of glitches. First, the company's initial foray into mapping software didn't work. Then there were scratches on the cases. The strikes at Apple's principal manufacturer in China, Foxcon, didn't help. Yesterday, I learned that a blue tint appeared in flash photos. If you only want to buy when there is blood in the street, that time is fast approaching for Apple.
On top of this, you have had a general move to the "RISK OFF" trade since last week, along with an unwinding of the QE3 trade. Watch Apple stock trade tick-for-tick. There is no reason for this correlation beyond the "RISK ON"/"RISK OFF" dynamic. It is amazing to watch.
The bad news was enough to prompt several managers to lock in profits before the year-end. Apple has been the top performing stock this year for almost everyone. They may also want to duck some volatility ahead of the presidential election, which has suddenly become a race once again. But the Apple story is still there in all its glory, and despite the recent disappointments with the iPhone 5, you still can't buy one, even at $900 without a contract.
The particular attraction of the (NASDAQ:AAPL) January, 2013 $525-$575 Bull Call Spread is that the upper strike is bang on the 200-day moving average for the stock. This will be my line in the sand. See, there is a method to my madness!
Apple holders may be about to get bailed out by the iPad Mini. My sources in China tell me that the next generation iPad is already being mass-manufactured by foreign affiliates. Parts suppliers there confirm the same. Invitations to the San Francisco launch at the Moscone Convention Center could go out as early as next week. CEO Tim Cook is expected to show his hand no later than the October 25 Q3 earnings announcement.
Those who moaned missing out on this investment miracle can start scaling in here, and add to positions all the way down to $575.