Market Analysis

AAPL Check #2

On February 16 in $AAPL Check I had issued a technical warning on $AAPL as it was trading at around $325. The technical warning came with a recognition that the stock was very expensive: “$AAPL now has a market cap north of $1.4 trillion with a forward multiple of 20.6 and a PEG ratio of 1.93 following arguably the largest and fastest market cap expansion in history”.

Based on the technicals I called for a technical reconnect risk to $261. During the March crash $AAPL promptly not only hit that target but ended up proceeding to move to $210 and then staged a furious rally off of that level courtesy unprecedented central bank intervention.

There is little substantive argument to be brought forth that the stock now deserves a higher valuation than in February as sales will be sizably impacted this year and into next as global economies will have to work through a much higher unemployment picture.

But nevertheless here we are. The updated valuation picture for $AAPL in the midst of the largest economic crisis of our life time:

“$AAPL now has a market cap of $1.4 trillion with a forward multiple of 26.8 and a PEG ratio of 2.23”

That’s a 30% increase in multiple in just 2.5 months. Not on better earnings, not on better growth, no, on exactly the opposite. So investors are now paying a 30% premium on the stock versus February based on the new fundamental picture which is weaker than before.

Given this vast increase in premium and multiple perhaps a revisit of the charts and I’ll use some of the same charts I used in February.

First the daily chart:

As you can see $AAPL topped shortly after my February article and fell out of its steep wedge.  The initial drop indeed landed near the $261 target zone I had outlined, the subsequence bounce from that zone (validating the technical target level) that bounce ended failing and $AAPL promptly corrected lower and stopped at the .618 fib.

So all in all a very nice technical play on $AAPL and the bounce very much made sense in line with the bear market rally case I outlined on March 23 (1929 Redux).

But now note this rally has been so steep $AAPL has formed yet another rising wedge that appears at risk of breaking down. Again.

The weekly chart highlights the historic steepness of the channel:

Does this preclude $AAPL from making new all time highs? I suppose if sales, growth and earnings don’t matter and artificial liquidity trumps all then perhaps not.

But what the weekly chart strongly suggests is that any new highs would produce a massive negative weekly divergence.

In AAPL Check I also highlighted a quarterly chart showing $AAPL’s vast extension above its quarterly band highlighting that an extensive extension above the quarterly Bollinger Band has historically shown a poor risk reward ratio on the long side.

With its recent near vertical ascent $AAPL has yet again extended far above its quarterly Bollinger band:

This now makes the 3rd quarter in a row that $AAPL is extending above its quarterly Bollinger band. Similar repeated extensions above that quarterly Bollinger band did result in corrections to the quarterly 15MA which is currently residing at $192.

Investors may want to keep that history in mind when chasing a stock into all time highs at a multiple price inflation of 30% in just 2.5 months.

Indeed, new highs or not, without sustained new highs $AAPL the stock is at high technical risk of placing a double top. Its forward multiple was expensive at 20 in February. A reversion to just that already previously expensive multiple suggests significant downside risk in the stock. Ironically a multiple adjustment to align with the actual fundamental picture would put $AAPL right at $192 or 35% lower.

For now the liquidity equation unleashed by the Fed and fiscal authorities continues to dominate the price action. But, as we’ve seen in February, things can change quickly and if they do, know that $AAPL has hit its quarterly 15MA seven times since the financial crisis. In 2008, 2009, 2013 (twice), 2016 (twice) and even in 2019. And yet, for some reason, investors believe it won’t happen this time during the largest economic crisis of our lifetime.  Instead the stock is being chased above its quarterly Bollinger band at a forward multiple of 26.8.

It appears $AAPL the stock is repeating the sins of the past, except this time at a much higher forward multiple hence, in my technical and fundamental based opinion, $AAPL has a very poor risk/reward ratio from the long side and further gains should be viewed with extreme caution and perhaps an opportunity to sell.


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Categories: Market Analysis

13 replies »

  1. Thank you for all of that data Sven….AND since AAPL is 5% of the S&P, it may very well be a leader to tip the iceberg.

  2. Always on target Sven, your insights are always greatly appreciated. Interested in your thoughts on semiconductors, AMD specifically, as the longterm charts seem to point to a dramatic overvaluation.

  3. Sven,

    Thanks for the analysis, yet with all the broken phones due to the riots, fed logic would dictate that APPL is a raging buy as the broken window falacy is alive and well. Just as a safety hedge, I set a large buy on APPL just now for $196, good for 12 months. Doubt we will see $196, even if an astroid takes out the China APPLE factories, yet at some point people might begin to question if money can solve every problem on Earth forever…

    Good luck in all your investments!

  4. Be careful out there, as this riot situation just went up a notch with the President pouring fuel on the flames today, per Bloomberg:

    https://www.bloomberg.com/news/articles/2020-06-01/trump-calls-on-police-to-dominate-following-floyd-s-death?srnd=premium

    “You have to dominate,” Trump said Monday in a video conference with governors and law enforcement.

    “If you don’t dominate, you’re wasting your time. They’re going to run over you, you’re going to look like a bunch of jerks. You have to dominate and you have to arrest people and you have to try people,” Trump said.

    I think what is really scary is at some point, the bottom 99% are going “DOMINATE” the top 1% in order to survive. This ia a huge mess on every level, yet not sure it matters to Wall Street as long as the printing press building is the last one standing.

  5. Wise to watch AAPL, as it goes so will the markets, and I concur with your excellent analysis, Sven. If AAPL goes to $196 then it likely goes to $160 so you might want to rethink your call anonymous above. Methinks if it drops below about 260 the current illusion is dispelled.

    “Who’s next” another anonymous asks. ‘Twas an excellent album, this track is live music at its best:

    Sing along when this bubble pops. Meanwhile, a quarter of previously US workers have become unemployed over the last couple of months; GDP will be down 30%+ in the current quarter; there is widespread rioting and unrest in response to yet another police murder of a black man; the current POTUS seems intent on fanning that conflict and seems incapable of doing anything remotely constructive; lockdowns are being relaxed despite COVID incidence remaining high (20k new cases, 1k new deaths, per day in US) risking an upward acceleration. Yet… stock indices are within 10% of all time highs and going up. This incongruity cannot persist for long.

    “at some point, the bottom 99% are going “DOMINATE” the top 1% in order to survive.” says another anonymous. This is a rare occurrence but we may be nearing such a time in USA, and many of them have guns too.

    Reality is changing, REALLY.

    Be aware of that and be aware you cannot know where it is going, you can only react once it has. Take care, these are difficult times which will seem good in hindsight, sadly.

  6. In the same vein (vain? LOL), Genesis had something to say on the present situation back in their very early days:

    There doesn’t seem to be a complete live version with video, sorry, but this is probably the best live audio.

  7. Apple is buying back 50 billion in stock. I wouldn’t buy it, but I wouldn’t short it either. I’d short Apple’s suppliers, which will realize the true pain as Apple continues on as a do nothing momentum trade, devoid of growth potential.

    As long as the Fed is interfering in the markets, no valuation is too extreme. Stocks gan grind higher forever.

  8. Thank you Sven. As you noted – Liquidity rules the day.
    Old fashioned Technical analysis is no longer effective and AAPL along with QQQ with break to new ATHs and beyond very soon, pulling DIA and SPX along for a wonderful bullish run higher. There will be no repeat of the Feb crash because the FED are on it full throttle this time.

  9. Sven,

    “WHEN” the fed finally enacts negative interest rates, will that be a “Sell the news” event, or are we going to see the SP500 at 5000 soon afterward? Look on the bright side, we can all be paid to buy apple phones when using the negative rate payment plans…

    Negative interest rates could be needed for a ‘V’ recovery, Fed economist says

    https://www.cnbc.com/2020/06/02/negative-interest-rates-could-be-needed-for-a-v-recovery-fed-economist-says.html

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