We have been skeptical of Apple Inc’s ability to maintain its status as equity market leader since Steve Jobs’ passing. At the heart of our skepticism lies a lack of innovation under current leadership. We regard $AAPL as, more-or-less, a one trick pony at this point (i.e. the iPhone)–and others have learned the trick (i.e. the Samsung Galaxy).
As such, we have been comfortable on the sidelines since 2014, despite $AAPL’s ubiquitous representation in individual and institutional equity portfolios as well as in equity market indices (we last warmed up to Apple in 2013, well into the 45% decline suffered between September 2012 and May 2013).
With shares trading at $116 in November 2015, we reiterated our concerns (internally). At the heart of the bearish case we articulated was peak short-term, and stretched medium-term momentum. But we also cited cues from classical technical analysis that likewise warned of probable weakness ahead. Specifically, $AAPL’s August through November 2015 surge constituted a Fibonacci 78.6% retracement of the decline from the May 2015 peak, and, as such, represented a reasonable point for an inflection. Further, the November peak materialized as a failed test of the trendline connecting the August 5, 2015 low with the September 14, 2015 high–likewise suggesting that the turn was likely of significance. The following annotated chart is taken from an internal note we circulated to team members on November 11, 2015, and has not been altered in any way.
More recently we restated our concerns just ahead of the April 2016 earnings report, which featured both top and bottom line misses and precipitated a slide from $112 on April 14, to $89 less than a month later.
Further, days after May 12 low was forged, we remarked that the decline appeared to represent a completed (downward) impulsive Elliott Wave pattern. This observation implied a bounce was in store. And bounce Apple did. The stock advanced by about 13.5% in the two weeks following the May low, besting the S&P 500 Technology sector by about 400 bps.
However, short-term momentum probably peaked today, and appears slated to deteriorate for at least the next couple of weeks. Similarly, medium-term momentum is expected to worsen throughout June, and monthly momentum looks set to slide into the Fall. The momentum backdrop at various degrees is illustrated in the exhibit below. Collectively, indications from our timing models hint that the near-term run is most likely done for $AAPL, and that weakness is now on tap over short to medium horizons.
Our third exhibit illustrates our medium-term predilections toward each of the ten Global Industry Classification Standard sectors for global equity (based on relative momentum indications for each global equity sector, compared to the global equities space). Notice that our work is not favorably disposed toward the Information Technology sector in general. In fact, momentum is not expected to bottom for Tech vs. global equities until July 8–the same date the model forecasts a turn in $AAPL’s momentum.
As of June 2, Apple’s 11.58% weighting makes it the largest holding in the iShares Global Tech ETF ($IXN)–our favorite proxy for the global IT sector. Thus, our broader market expectation for underperformance from the global Tech sector fits with the idea that a pause is due for $AAPL shares specifically.
Importantly though, we expect Apple’s next medium-term low to mark an attractive longer-term entry point. Per the bottom pane of Exhibit 2, monthly momentum is likely to be near trough levels when weekly momentum next bottoms. Also, we note that Apple’s trailing 12-month P/E ratio too suggests opportunity ahead. Note in Exhibit 4 below that solid gains accrued in each instance after $AAPL’s P/E breached its lower Bollinger Band and then bounced back above this key level.
The P/E essentially doubled between December 2008 and November 2009 following this sequence of events. And shares gained 682% in the 33 months that followed the successful December 2008 test of the lower Bollinger extreme. This phenomenon next occurred March 2013. The P/E expanded by 84% over the ensuing 20 months, while shares virtually doubled over the two years and two months ended April 2015. This signal was registered again in February 2016. Consistent with the historical precedent , we expect the $AAPL shares to (eventually) amass significant longer-term appreciation yet again. However, our best guess is that a correction is due first.