If we were looking for the most ideal stock to buy it would be a stock that had amazing innovation, huge brand recognition and a constant pipeline of must have products. They would also be so creative that they invent multiple streams of revenue sources to go along with their products and they are managed by some of the best management around. There is such a stock and you know it well, it’s called Apple.So it sounds like the perfect company. It’s true, I like the company so much that I own most of their products myself. I ‘m sure I’ll receive emails from angry Apple lovers giving me another 50 reasons to own this stock so are we saying to sell Apple? Here is why
Reason #1 to look at selling Apple is the market. If you believe my former employers research, William O’Neil & Co and founder of Investor’s Business Daily, then 3 out of 4 stocks follow what the market does. This is true but our research shows that the numbers are much higher than 75% during the heavy selloff days and during markets that are transitioning from a Bull market to a Bear market. Either way this is the first reason we would look to Sell Apple. You may argue that Apple should and will be one of those few names that go up in a down market. Relatively speaking you may be correct so far, but this brings us to reason #2
Reason #2 to consider Selling Apple is just take a look at the chart. Apple hit new highs in April and has been trading back and forth in a 15%-20% range ever since (Excluding the Flash Crash low which was much lower). On June 21 we hit a new high but that breakout failed miserably like most breakouts do in bearish markets. The rally that led up to that high was on light volume and now the selloff seems to be accelerating on heavier and heavier volume each day. The volume was so massive this week that it overwhelmed all buyers at the 50 day moving average and just kept going. Heavy volume breakdowns through support levels especially the 50 day moving average has historically signaled the end of a trend and lower prices to come.
A stock doesn’t change its strong trend overnight. When a trend begins to change, one first starts seeing a struggle between the profit takers and the buyers and at the end of a run the supply starts weighing the stock down. A battle between the 2 forces can cause the stock to make a few moves higher followed by a few moves lower until one side finally takes control. This is what has been happening with Apple. This is the fourth time Apple has broken its 50 day moving average support area in the past couple months . This is an important line to hold since this is where many buyers wait to buy more. We like to use these critical points as a TELL(like in poker). If the buyers are weaker than the sellers than we can see inside the mind of the institutional players. When the obvious places where the buyers normally buy gives way to sellers, then we know who is now in control and what a majority of the big money is looking to do with that particular stock.
One other thing to look at on the Apple chart is the volume patterns. We are seeing moves lower are on higher volume and the bounces are on light volume. This is normally indicative of a trend to the downside.
Reason #3 Everyone owns Apple. From the savviest fund managers to the novice investor. In fact if could see inside everyone’s portfolios, I almost guarantee the common denominator stock across the board would be Apple (Anyone have a good way of seeing the number of small investors who own Apple?) When everyone owns a stock, then there are no more buyers. Here is another point we would like to make that won’t be popular. When you are in a correction or a Bear market and you run out of buyers things like book value. PE ratios, dividend yields and future estimates mean nothing. I know most of Wall Street has everyone fooled into buying on such valuations, but those measurements are worthless when there are more sellers than there are buyers. If you can read the charts you can see about3- 6 months ahead of the fundamentals. Remember, fundamentals are always the best at the top and it isn’t until 3-6 months later when one realizes the fundamentals are getting worse that they decide to sell. Meanwhile the stock has already tanked and only those smart portfolio managers and those who can read the charts got out before the stock plummeted. A 3-6 month head start before the pure fundamentalists sells their stock, now that’s a head start everyone should be looking to get. If you don’t believe just look into the dark corners of your brokerage account. Remember those great stocks Lucent, WorldCom, JDSU and of course many still own CSCO, MSFT, INTC, AOL, and DELL. Well if you bought those stocks and listened to the millions of different fundamental reasons to hold on, by the time things did start to deteriorate fundamentally it was too late. I remember seeing most firms back in the early 2000’s keep their buy ratings on all those stocks until they ran themselves into the ground. The first 3 favorite stocks aren’t even around anymore and the last 5 stocks haven’t done anything for over 10 years now! Dead money, thanks fundamentals.
What to watch before pulling the trigger:
It may not be too late If Apple can mount some heavy volume up days and retake its 50 day moving average. If this happens then we would hold on. If Apple can hang on to its short term uptrend line as seen on its chart, then we would hang on and see if it can make another attempt at regaining its uptrend. If AAPL trades back up to the 50 day MA and it acts as a ceiling, we would look to close out our AAPL. If AAPL exhibits these negative characteristics we would most likely see a move of at least 15%-20% lower. We would be more interested in buying AAPL at those levels then to hang on and watch our profits disappear.
To view similar situations on favorite stocks read our recent stories on GOOG, GS, HPQ, QCOM
Disclosure: no positions