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Down 33% in Four Months... Is it Time to Buy Apple?By
Friday, January 25, 2013
"If anything, I wish I had been more aggressive with the call," I told my True Wealth Systems analyst Brett Eversole yesterday morning.
In the September 27 DailyWealth, I warned readers of a potential peak in Apple's share price. Four months later, the stock is down 33%.
As longtime readers know, I don't touch hyped stocks like Apple. And while I don't usually like calling tops, the Apple story in September was too good to pass up.
Apple was the hot story. It had just made new all-time highs. CNBC reported on the company nonstop. Based on sentiment, I knew the top was either in... or close.
The timing was just about perfect. Apple's stock has crashed since late September, down 33%. And many investors are left wondering if now is the time to buy...
My answer is simple... While it might seem like a great time to buy Apple (NASDAQ: AAPL), I wouldn't put a dollar into the company today. Here's why...
The talking heads on CNBC might make it seem like everyone has given up on Apple. But that's not the case.
First, of the 58 brokerage firms that cover Apple, 48 have either "buy" or "strong buy" recommendations on the company.
Only one brokerage has a "sell" rating, and two brokerages have "underperform" ratings. When I wrote my initial piece, only one brokerage had a "sell" rating on the company... So while brokerage analysts are less bullish on Apple, 95% of analysts still have a "hold" or better rating on the company. Analysts haven't given up yet.
More importantly, investors haven't given up either. In fact, based on one measure, investors are backing up the truck...
When I called the top in Apple, I noted an extreme in the ratio of the volume of call- and put-option trading.
Remember, buying a call option is a bet that the stock will go higher. Buying a put option is a bet that the stock will decline.
Back then, traders were buying an extreme amount of call options, relative to puts. They were betting that shares would head higher. The contrarian trade was to take the opposite bet... to go short Apple.
Now, with Apple's stock crashing, you would expect investors to follow the trend and short the company. But that's not the case today...
As I write, the put/call volume ratio is at its lowest level in 11 weeks. That means investors – specifically, options traders – are the most bullish they've been since early November.
As contrarians, we never want to buy when everyone is bullish. Extreme bullishness often causes the market of buyers to dry up. And when no buyers remain, the stock usually goes lower.
Even though the stock is falling, investors are still incredibly optimistic today. Option traders are backing up the truck, trying to buy the bottom in the stock.
Of course, everyone could be right. Apple's stock could turn around from here. It still sells a fine product. And the company is still a good value. But I'm not interested in buying today.
Apple is down 33% in four months. The trend is clearly down... yet investors are giddy to buy shares. They're still incredibly bullish. And analysts still love the company.
This is the opposite of what we look for... We want to buy what's ignored... what's hated. And we want to buy it after it's begun an uptrend – to limit our risk.
Apple could be a good buy at some point in the future. But the trend is down, and investors are still bullish. That's not what we look for in an investment. Apple isn't a buy today.
Good investing,
Steve
Further Reading:
"Apple shares will peak when there is nobody left to buy – when everyone who wants to buy has already bought," Steve wrote in September. "At least in the near term, we may be getting close to that point..." See what factors helped Steve call the top in Apple shares here: The Day Apple's Stock Peaks.
Steve looks for stocks that are "cheap, hated, and in an uptrend." Read up on one opportunity that meets all three criteria here: Make 53% a Year in This "Left for Dead" Trade.
Market NotesA "LESS BAD" RALLY IN A COAL BELLWETHER Shares of an important coal bellwether are showing signs of a new uptrend.
Regular readers know it's hard to find a more beaten-down sector than coal. Tighter regulations and cheap natural gas (a coal competitor) drove coal stocks to super-depressed lows in 2012. U.S. coal production was down 7% over the previous year... And equipment auctions were filled with used bulldozers and excavators from shuttered coal operations.
But things are starting to look "less bad" for one of the world's biggest makers of coal-mining equipment…
Joy Global (NYSE: JOY)has a "front row" view of the global coal market. The Wisconsin-based company gets 75% of its sales from coal miners, with more than half coming from outside the U.S. When its customers are struggling, Joy Global's "bookings" (equipment orders) drop. That was the case all last year. This caused shares to lose half their value since early 2011.
But as you can see in today's chart, things are getting "less bad" for Joy Global. Last week, the stock touched its highest level in eight months. It's a bullish sign for investors looking to play the beaten-down coal sector.
– Larsen Kusick
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