The Screws Tighten on Apple Investors

I hate to be the bearer of bad news. I simply can’t bear to watch what is happening out there, we’re barely hanging on by the skin of our teeth. I can list dozens of reasons why I hate bear markets, but the biggest is that it makes me feel on edge, nervous, ill at ease. The other big reason is that it’s much more difficult to invest in a bear market, especially one that has been marginalized by investors. How else can one explain the low $VIX reading as we near March lows?

As an Apple (AAPL) enthusiast my company is on the verge of a transformative event, expanding into a world market place, with a disruptive mobile computing ecosystem. I say ecosystem instead of product, because it’s not just about the iPhone, it’s the compendium of supporting characters, from 3rd party developers, to the App Store, iPhone and iPod Touch accessories, a born-again OS X (Snow Leopard), 3G and GPS. But with this bear market breathing down our necks, I’m afraid the world-wide introduction will be muted to some degree.

Let’s take a look at the market. We had a spectacular Bull run from the March lows to nearly topping previous highs, only to be snatched and dragged down. For a time it appeared to be a simple correction, but time after time, the markets failed to break away. Now the Dow has dropped below not just March Lows, but January lows as well. The S&P 500 is hanging on by the proverbial thread. And that thread nearly came unwound  on Friday (July 3) falling below critical support at 1256, only to be propped up at the last minute by some brave Bulls.

Both the Naz and S&P have been teetering on the verge of breaking through major resistance. Oil is their nemesis on the other end of that seesaw. If Oil breaks through $150 a barrel, that could knock both the S&P and Naz of their perch and fall into the abyss. Once they do, that critical support will become strong resistance, making it very difficult to recover. And I’m not encouraged by market internals either. Sometimes you can make the argument that there’s a good foundation, or a good base from which to prop ourselves up. But not in this case, the foundation is rotting. The Advance-Decline line is about as bad as one could imagine, and new lows have outpaced new highs for several weeks now, with now end in site.

Then you have the TA radicals talking about the Hindenburg Omen, named after the Hindenburg Disaster. A technical analysis scenario that predicts a stock market crash. Apparently, the technical factors have aligned themselves recently, such that the chances of the stock market crashing, specifically the NYSE, has a very high probability (25%). There has never been a market crash that did not occur without these indicators present. The rationale behind the indicator is that, under normal conditions, either a substantial number of stocks establish new annual highs or a large number set new lows - but not both. However, this indicator mainly tracks new lows and downside risk (there are several other factors as well). Well all that’s happened on two separate occasions just recently. The Omen predicts that the crash will happen with 180 days.

Now I’m not saying this will happen. I’ve only become aware of the omen just recently through a subscriber, and at first I thought it was just a bunch of bunk. But to hear it on a financial podcast, on the national news and start reading it online and in print, the possibility starts wearing on you.

OK, so enough of that. Let’s get back to more conventional technical analysis. As I was saying before the omen, market internals are pretty bad. Even after the mini rally just before the long Jul 4th weekend, the decliners still outpaced advancers significantly.  The NYSE decliners to advancers was 2 to 1, the Naz was 8 to 5. Now even with oversold conditions, where one might expect a bounce, I can’t bring myself to pay that possibility any attention. In fact, this pattern has reared itself several other times during this downtrend, usually preceding big reversals.

The other problem is sentiment. Even though the VIX has been inching up (currently just below 25), and the Put-Call ratio has been spiking a bit, getting as high as 1.5 to 1.6 during the day  (21-day average is 1.05), it always seems there’s a reprieve. And we get a break after some really bad down days, pressure is released and things are OK, we can handle that. It’s kind of like the frog in the cooking pot. You put him in the pot with cold water, and slowly crank up the heat until he’s cooked. The frog doesn’t notice the rise in temp, so he’s complacent to sit it out until it’s too late. What we need are several down days to really crank up the fear (getting the 21-day Put-Call ratio to 1.20 and the VIX to 30), to a point of capitulation, and then maybe we’ll see a reversal.

So with Apple releasing the 3G iPhone into the wild this week, what can we expect? I think there are going to be wild swings in the price of AAPL. The hype and anticipation will crank up the price, but the market, unless it does a miraculous reversal is going to be a huge gravitational force, that even AAPL won’t be able to escape. I believe AAPL will revisit the high 160s and perhaps touch the low 180s, but will ultimately settle back to where it currently lies, the mid to low 170s. So, my best advice is more of the same. Play it light if you must play the market, I prefer cash.

Disclosure: Long Cash

Comments

[User 58276]

Why is it difficult to invest in a bear market? Unless you are a day trader (i.e. gambler rather than investor) it is very difficult not to find outstanding bargains in a bear market. As in real estate, you make your money when you buy.

[Toni]

Top today or tomorrow (for the market).

[FreeRange]

The sky is falling doesn't work here. First, left out is the very important component of the described Apple ecosystem - Mac sales momentum and the halo effect on Mac sales created by this ecosystem - the Mac is probably the most important leg of the stool based on margin and revenue. Anecdotally, my retired mother-in-law is visiting us now from China. She and all her retired friends plan to buy the iPhone when it becomes available in China. Unfortunately she leaves for China the day before the 3G launch as some of her friends wanted her to bring phones back. This is a group of people who all worked in the theater on the governments payroll with low salaries and pensions. Is the global impact underestimated here? The largest opportunities for Apple are in fact global.

[OneTooth]

This current phase of the bear market will not end until APPL trades back below 125. Over-owned, over-hyped, and hardly immune from the slowing economy. What's bad for NVDA and displays, as well as the chips for phones, is bad for APPL, too.

[F. J. Taylor]

There are a number of things to remember about Apple - first is that it is just beginning to regain its once dominant role. These articles show what is starting to happen everywhere, in both business and personal use:

www.appleinsider.com

'Huge demand' forces O2 to pull plug on iPhone 3G pre-orders
O2 began taking pre-orders for Apple's new iPhone 3G through its website early Monday but was forced halt the service just hours later as UK consumers flooded the carrier's servers and quickly consumed initial supplies.

German publisher drops 12,000 PCs for Mac
One of Germany's largest newspaper publishers will become one of Apple's largest-ever customers when it converts all of its 12,000 computers from Windows systems to Macs. Also, the latest beta of Flash Player 10 promises to boost sluggish performance with Apple computers.

Multiply this trend world-wide, and factor in Asia (as FreeRange mentions above), Apple's huge bankroll (18 billion and rising), excellent products and strong following, and you see a world growth that will off-set the market declines that are almost inevitable.

Will a market crash occur? IMO, indubitably. The economy is in deep kimchi at this point, due to a number of factors. Will it be world-wide? Almost certainly, as we are all bound together now, like it or not. Will it be long, deep, and painful? Again, almost inevitably.

As to stocks in general - my advice would be to stay out of most - but as with all declines and even crashes, good, solid, stocks with good potential are the ones to be in. You pick the one with the most potential and best fundamentals, and buy when it is low. Aside from the "basics of life" stocks (food, water, etc.), there are few I would recommend - Apple is one of them.

As to Mr. jesselivermo's comment - I hardly think Apple is "over-hyped" - his comment smacks of a disgruntled PC fan, though it is true that nothing is immune from the coming storm.

I have Apple, which has more than doubled since I bought it and plan to hold it. (Note: I did sell enough to cover my investment when it was higher, so I am now playing with "house money" - something I always advise when investing or gambling - both of which share similarities.)

[Mac Fanboy]

The huge growth in earnings for Apple is going to trump anything that you or I write about this promising stock. The iPhone revenue hasn't yet shown up fully on Apple's books. The new iPhone is so popular already that 02 had to kill additional pre-orders in GB. Mac sales are increasing exponentially. Even iPods sales are not in decline but rather shifting to higher margin products. This stock will fall but rise again, and again, at least unless/until the general economy gets to be bad enough that people won't buy new Apple products.

[Florin]

The Apple Bubble

P/E: 34
Appreciation: 2400%+ (compare with oil, 1400%+)
Signs of top: screaming people in front of apple stores

[contender]

AAPL's not overhyped ??

*LOL* now thats funny !

AAPL products have always been overhyped -- they have also always been overpriced -- which means that they wont achieve the kind of penetration the aapl zealots contend.

Regardless of stock price, AAPL is completely overhyped -- and given that nobody /needs/ any of the stuff they sell I dont see how anyone (other than an aapl zealot, of which there are many) could even think aapl stock would thrive in an extended economic downturn.

Shoot tech in general has gotten /killed/ because tech spending, even at the corporate level is considered fairly discretionary by wall street -- yet a consumer tech company is gonna buck all that and go up while the market tanks ?

Ok im gonna sell all my PG and buy AAPL to protect me from the bear !

[YASHIVA]

I AGREE WITH ZACH. THE MARKET IS INHERENTLY DANGEROUS NOW. APPLE CANNOT ESCAPE AND WILL SWING WITH THE MARKET. IT IS SO CLOSE TO JULY 11, AND APPLE DID NOT TAKE OFF. SOMEBODY, SOMEWHERE IS NOT CONVINCED AND ARE MILKING THE COMMON INVESTOR. SO, PLEASE WATCH OUT AND DO NOT GET HURT. APPLE WILL SEE THE HIGH 150'S SOON.

[mollytjm]

will any really good company get doused in the flood of negative market news? yes. will that incude Apple? yes. in the short run. in the long run, Apple is a winner. Even European companies are starting the switch to Mac. the iphone is a year old. in another year, it'll be all over the world as will Macs. so in the long run, Apple will prove to be a great investment. And it won't go bankrupt either! and it won't start putting out products like Vista!

[p. smith]

someone who claimed to be "long cash" now is the one who'll long cash until the market is at top.

[Hugo vander Vlist]

Besides all the TA and market analysis, what I see is just this: Apple is making lots of money, and will make even more money in the second half of 2008. Still, the share price is below where it was at the beginning of 2008. So we can go a little higher still. Especially because the market share in computers has a lot of room for expansion. iPhone will be a hit too, although not everybody seems to notice yet.

[Brewer]

The bull market for apple didn't stop or get 'snatched and dragged down'. Apple is still flirting with historic highs, despite the market trends. If the market were not bad, Apple would be $300+ a share, easily.

[Partners inGrime]

The trend for Apple and Mac products is upwards. Mac products may have been overpriced in the past, but they are competitive now. Some folks need to take another look.

The App Store coming online through iTunes will prove to be another gold mine. Easy for nongeek folks to buy and install software and a central place for developers to reach iPhone and iPod touch owners.

Looking forward to APPL Q3 conference call July 21.