I turned bullish on shares of Apple Inc in late-2013, after watching the stock drop as much as 45%, from a high north of $700 to an eventual low sub-$400, and then rebound by 35% back to the low-$500s. As is illustrated just below, at that point, my longer-term momentum oscillator suggested a classic BUY signal was imminent.

Momentum turned bullish AAPL October 2013
Momentum turned bullish AAPL October 2013

Just over a half-year and more than 100 points (or 20%+) later, I find myself plotting an exit strategy, as the support from bullish momentum looks set to fade in the near future, while factors that supported my bigger picture bearish predilection remain in place. For instance, quarterly momentum peaked 4Q12, and appears slated to deteriorate indefinitely. This condition fits with the lack of innovation that I have, on several occasions, indicated as a headwind to Apple since the passing of former CEO, Steve Jobs. Given the strong charge Samsung has mounted in the smartphone space in recent years, innovation is critically important to AAPL’s success going forward, in my opinion. Recent actions such increasing share buybacks and dividends and even announced acquisitions highlight the lack of organic creativity that plagues the behemoth firm (in theory, if high-growth opportunities were bountiful in-house, the firm would likely be more reticent to use capital for these less productive purposes).

For reasons detailed in the following graphic, I am looking for continued strength from AAPL into early-July, and for price to carry up to the $685 ballpark. I expect to be a seller at that point.

Momentum now expects AAPL strength to start to wane by early-July
Momentum now expects AAPL strength to start to wane by early-July

Separately, remember the ‘old days’, when the market moved as did AAPL? The chart that follows features a period where the rolling correlation between changes in SPX and AAPL were reasonably tethered (the leftmost portion of the chart, where the black, rolling correlation series hovers about/above the dashed, gray long-term correlation series). Since the Fall of 2010 though, the path of AAPL and the broad equities market has become increasingly divergent (represented in the chart by the black series falling below the dashed, gray series). Of interest, this year, the linkage between AAPL and the broader market has recoupled, as the rolling correlation between changes in this pair has recovered from negative to positive territory in 2014, and looks to be improving still.

Correlation between changes in S&P 500 Index and changes in AAPL share price recovering
Correlation between changes in S&P 500 Index and changes in AAPL share price recovering

The obvious implication of the restored relationship is that, barring another imminent breakdown in the correlation, upside for AAPL should translate to strength for the S&P 500 Index. To test this thesis, I analyzed medium-term momentum for the S&P 500…drumroll, please…the model anticipates that momentum for the market index will peak the week ended July 4th–exactly consistent with momentum’s message for AAPL.

Momentum indications for S&P 500 match that of AAPL
Momentum indications for S&P 500 match that of AAPL

Thus, while continued strength for both AAPL and equities look like the highest probability events over the course of the next month or so, momentum suggests it prudent to reduce exposure to AAPL and to stocks broadly heading into the Independence Day holiday.

Stay tuned!

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