WOULD YOU BUY THIS STOCK?
I love using charts as a supplement to a broader perspective. Sometimes, glancing at a picture is the easiest way to absorb the current trend in a market. This can be enormously helpful when gauging risks and entry/exit points. As part of a bigger strategy, charts are not only helpful – I’d say they’re a downright necessity in properly gauging the big picture.
Yesterday, I discussed how stability breeds instability and disequilibrium builds within the illusion of stability. With charts, you can sometimes visualize the psychology of the market and the driving force that leads to instabilities and creates environments of excessive risk.
With that said, I don’t have an investment prediction, but rather a thought experiment for readers that might help understand this particular component of my outlook. Would you buy the following stock for a brief holding (2-3 months)? If so, why? If not, why not? I’ll follow up on the post later tomorrow after some discussion has unfolded….Maybe we can make some broad conclusions that help us all better understand risks and gauging market movements….
Apple?
Yes, small buy.
I’m pretty sure most of us know what stock this is, but if I HAD to pick Long/Short, easily I go Long even if the R/R is not favorable here.
What I would love to see is some digestion/sideways action/small retracement before getting Long.
…is the right answer!
TheArmoTrader wins the prize for best AAPL trading strategy in the current climate – that is, if history is any guide.
I looked back at APPL charts from 1983, and the first thing that jumped out at me was that the stock is currently more than 3 standard deviations above its 200-day moving avg. Usually, that is a gold-leafed invitation to go short, since a stock will often pull back from that level like a hand from a hot stove.
But AAPL has closed above that level for 4 straight days. That’s incredibly rare, and throughout its history turned out NOT to be a warning of over-extension but a significant sign of strength.
Each time, prices flatlined or pulled back a little in the very short term (1 to 3 weeks) then pushed higher. Substantially higher.
Here are the stats:
Total gain from today’s equivalent (the fourth day’s consecutive close above 3st devs > 200DMA) to AAPL’s peak price over following 12 months:
19 Jan 1987 – 5 Oct 87 = 117%
7 Sep 1999 – 22 Mar 00 = 89%
9 May 2003 – 15 Apr 04 = 60%
19 Oct 04 – 4 Oct 05 = 173%
The first three examples behaved in a civilized manner and pulled back to their 20EMA before mounting the next move up. The 2004/5 example was so strong the stock moved sideways for a week then lurched higher without allowing dip-buyers time to finish their lunch.
APPL has proven to be a good shorting opportunity when it shows immediate weakness at 3 st. devs over its 200DMA. But on the rare occasions when it refuses to succumb to gravity and shows abnormal strength, it is clearly telling you to get long.
So, barring any evidence to the contrary, I’ll be buying AAPL on what I expect will be a very modest pullback over the next 1 – 3 weeks, looking for a multi-month move.
(It’s possible of course that this time is different. I checked the weekly and monthly charts for signs of over-extension by the same volatility measure. The monthly chart shows prices uncomfortably above the 3 st. dev. mark, yet they have been for most of the past decade when a peak at 4 or 5 st devs has been the norm. Also the stock is beginning to go parabolic – not a sign of sustainability. If and when the stock begins to show signs of weakness these will become things to worry about but, right now, there’s no question that momentum rules.)
@ OTM
Well done Sir! It matters if your right…but I always give credit to those who make a call and explain why. Anyone can tell you what play they would have called after the fact…
Even if your wrong..you won’t here a peep out of me. You made a move based on what the market is telling you to do. You took action and provided alot to chew on for those of us who are always hungry for knowledge.
BUT—I’m still convinced that is a chart of an old Railroad stock from 1907
It is AAPL – the chart is overextended. Needs a 33% retrace of the move for the dip buying opportunity to be good. R/R is unknown imo, they could invest cash wisely, or just GOOG and fund a series of stupid projects. Also labour practices have potential backlash along with squeezing all the businesses they work with.
Yes definitely Apple
For a short time period, surely the odds are stacked towards further gains? Trend is your friend
Price is going exponential on a log scale, so I’ll pass.
No, I view investment opportunities like boats at a dock. If you miss the ferry, you don’t jump into the ocean and swim after it. After all, the ocean is where sharks live.
Compared to institutional investors and congressmen who have insider access, direct trading lines to the brokerages, free margin accounts (by borrowing their customers’ stocks), and legions of robotic/analyst slaves at their disposal, I am just a very small fish.
I’d sit it out, but if there was a gun to my head, I’d be long. Such relative strength likely has more and more chasers, so I would assess the probable outcome of any dips being bought. That said, if you overlay this with SLV in April 2011, it is very similar. But, be wary of the recency bias!
I don’t think the comparison with silver is very instructive. The growth in Apple stock is certainly astounding, but the fundamentals arguably support the growth. This cashflow is something which shiny rocks cannot provide.
http://www.google.com/finance?q=NASDAQ:AAPL&fstype=ii
looks parabolic to me…wont buy…too late..
It’s aapl and is extremely overextended. All the technical indicators are at nose bleed levels. A buy at this level is for people who does not read charts. No company on earth can keep rising at this rate without a decent pullback. The extreme volume a few days ago is a tail tail sign of one last burst of mom and pop buyers. Followed by even higher prices on decreasing volume. Look out below. Wait for a pullback to at least the 20 SMA or even the 50 SMA. If all else is still good, then it’s a buy. The trend is your friend only comes into play after a healthy pullback and the trend is still in tack.
Ive always fancied a short on apple. Not yet, but soon once the product pipeline starts drying up and getting old.
It is too late. Maybe the next dip.
Here is the (potential) problem with Apple. Equity valuations are justified by long duration cash flows. On the surface it appears reasonable Apple’s stock discounts earning existing returns on its existing capital, and a modest benefit from excess returns on additional invested capital, for what is in effect, perpetuity. For many businesses that is a reasonable valuation, e.g. P&G, J&J, etc. But those companies enjoy an industry-normal return whereas Apple enjoys an ROIC that is 5 standard deviations from normal. As such it is not sustainable for the “perpetuity” implied by the current stock price. Also, how do you value the idle cash at Apple? Book? Why? They have shown no inclination to return it to shareholders. This says nothing about how Apple will “trade” over the next weeks, months or even three years; it only says something about what Apple stock is worth.
It boils down to whether you think the cash flow and margins are sustainable. At 15x trailing earnings the valuation is not outlandish. Just looking at the chart is not meaningful.
Without a broader understanding of the drivers behind the expected (or realized) increased profits its not possible to make a good judgement.
However if you are wanting us to guess based solely on the chart I would not buy because I believe the market in general over reacts.
I can’t rely on the trend being my friend either because theses not a long enough trend (although I cant see the time frame on the chart I assume its fairly short).
Can we comfortably say we are no longer dealing with a wall of worry?
http://www.marketwatch.com/story/emerging-markets-a-safe-haven-with-better-returns-2012-02-14
No, why? Better opportunities with less downside risk out there (even after the awesome rally, DAX has less downside risk than this) if you are a bull (has been saying this since Dec 2011 US markets vs. the world, and proven right).
Wow, I’ll mortgage my house, wife’s savings and child’s education funds into this.
- what’s time scale ?
- what’s my risk appetite?
- what’s the business of this stock ? were their some recent annoucement ? what were they ?
- will their be some future annoucement (results or whatsoever) ?
etc etc
If all we know is the chart, then answering the question merely reveals what type of buyer you are. If I were a short-term focused momentum investor, I’d say “of course I would buy that.” Because I am a long-term-focused value investor, I look at that chart and say “no @#$% way.” In fact, I _do_ own that stock and have for years, and no way am I selling (yet).
Let’s pretend I don’t know it’s AAPL.
If I look at the direction of the early trend, mid trend and late trend. And, also compare the volatility during each period, late period sentiment has strongly shifted to a calm herd/consensus behaviour.
P.S. whether I buy or not would depend on additional information on whether the permanence of the market psychology and the underlying megatrend backdrop justifies it.
Only if they sell yoga pants.
You got a log chart of something (looks more like the 2011 silver chart then AAPL to me) thats gone parabolic. I wouldn’t buy it because its way to extended therefore to much risk for me, if I were to do anything I might try a very small put option position. If I was lucky enough to own it I’d have to be selling off a good chunk into that rise.
I like the way you think, John, I was lucky enough to own & did sell some. Still have half. Looking to re-enter with the right set up, I’ll sell all if the price goes much below $500.
Obviously some consolidation is in order. At this time, the market loves even dollar amounts so 500 shouldn’t come as a surprise. The chart isn’t that scary when you consider the growth rate and valuation. All that and new products. And dividend rumors. If you wait for a big pullback you’ll miss it. Wait until there is proof this level can be held then buy on a break higher, provided the overall macro warrants being long. There is more to be lost than gained when betting against strength.
Depends on the FED’s most recent statment. If they trying to Juice the market by creating a “Wealth Effect” then sure, why not. But if Unemployment is going lower and Inflation is in check, and the FED is sitting on it’s hands, then Nope.
Why play ball with this one when it is clearly not an ideal time? There are thousands of other options to choose from and I would do that.
I think Cullen set this up as a thought exercize wrt the chartists out here. Specifically to separate it from all of the other issue associated with AAPL, since we all know it’s AAPL with 50 and 200 DMA. If one is truly a chartist, it doesn’t matter what company it is: would you buy this stock? My answer is no – regardless of the company, just based on the chart. I like Octavio’s comment – - it doesn’t look like there is a wall of worry here.
first i would climb into my wayback machine, and then i would buy
Apple is worth over 500 billions, more than the PIL of Sweden… ok good products, a huge pile of cash but it is in a big bubble.
The huge apple stock appreciation is also the key component of the US stock market performance and probably the the main reason of the overperforming respect all the other markets. So because markets = emotions, when (not if) Apple will correct, the stock market will tumble. Easy bet.
You’re kidding, right? If you own any kind of index fund you probably already own a ton of it. 3.57% in SPY. Probably soon to be 5%. Would you put 5% of your assets in any single security? (Damn, I just did the calculation; it’s a top 20 holding for me and I don’t even own a single share.)
Nope. Over extended. Volume tailing off. Wait for the pull-back.
Due to my ‘gap’ allergy, I’ll pass on the 2-3 month buy. According to recent NASDAQ data,approximately 85% of the gaps have filled over the last twelve months. What happened to the other 15%? The four non-conforming gap “ups” that refused to fill within a month took 24, 31, 50 , and 173 days to fill. One of the two non-conforming gap “downs” took 44 days to fill and the July 27th gap just filled this month. I’m sure this mystery chart would yield similar results.
If I can assume this is AAPL, I’ll buy with a 3 year time horizon (just pull the chart back 3 years to the beginning of 2009 and re-evaluate), or until that squiggly blue line crosses below the squiggly red line.
Pass. Wait for price to settle in a range delineated by the last gap and latest high. Trade the break out thereafter.
pass. spike wreaks of over valuation. wait for correction and re-assess. and seriously, why the hell would you not do your due diligence on the company to determine their true potential for capital gains? anyone who would buy a stock based on one look at any chart without finding out more is stupid. plain and simple.
parabolic
same curve type as when I sold 66% of my physical gold in August when it was $1860 (went to $1920 the next day and then plummeted).
pass, maybe buy later after the correction, but buy on fundamentals of the business.
Based on the chart alone, with 2-3 months in view – then no.
If it is AAPL, price is well over 2 standard deviations over the 60dma which has typically resulted in a flat trading range over the next ~5 months. Oct ’09, April ’10, Oct ’10, Jan ’11, July ’11. Again, no buy.
Depends fully on the valuation of the company. IF the current price was $20 on this chart, and my intrinsic value says $30, then yes.
If the intrinsic value says $15 and the price is at $20…. then heck no.
Normally I’d take a sample of the responses and what ever the consensus is I’d do the opposite.
But..the responses are all really good. Some smart folks who read this site.
I have a feeling CR is going to tell us this stock is WCOM, Enron, or pull an old Railroad chart from the early 1900s. I spent a good hour looking at old 2000 tech charts.(honestly i did) No luck..but I love this game…
I’d buy a put w/ 6months, priced for maximum leverage after assuming a general fibonacci retracement.
wouldn’t buy it…but also wouldn’t short it…
Will buy it on market corrections. Knowing it is AAPL and catalysts in the next 12 months I will accumulate on pullbacks instead of waiting for general market corrections.
Actually was looking to buy after that gap up – but would have sold an ATM strangle vs. the position.
I presonally prefer to “box in” a long position with strangles / straddles rather than be the genius who thinks he can get away with a 50% bull run…. (I admire those who have the cojones to hold on to a naked long for months)
AAPL – Hang on for $17,000 per share!
http://www.bespokeinvest.com/thinkbig/2012/2/13/is-apple-aapl-a-17000-stock.html
Sell it. Huge outside reversal day today in AAPL. Volume highest it has been in the past 12 months. iPad removed from Amazon China due to a trademark dispute. First test is the gap 10% lower. Think this along with the continued uncertainty from Greece drags down overall market over next few days / weeks.