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