Most reports you read and hear about Apple (AAPL) will cheerlead the company’s innovation, its products, the supply chain, its storied history, etc. Not this article.
At ETFguide when we talk about the stock market we focus primarily on the one and only thing that matters; price. That’s because if you buy assets at the right price, you’ll be rewarded handsomely. All the other talking points, are a giant and noisy distraction.
Let me explain by asking this one simple question:
As an investor in Apple’s stock what do you care more about? Apple’s revenues next year or the price of its stock next year?
If Apple’s stock rises 10% you make 10% more, but if its revenues rise 10% you make 0% more. Don’t you really care more about its price action more than its fundamentals? (For hardcore fundamentalists saying “fundamentals drive stock prices,” that strict view is only partially correct. Crowd psychology greatly influences stock prices, as both academic research and history itself show.)
What Really Matters?
Apple’s new iPhone doesn’t make you money, nor does its relationship with Foxconn. Steve Jobs didn’t make you money and neither does Tim Cook today.
You see, minus the measly dividend return of 2.2% a year, no one at Apple actually makes you money. With such a small dividend, forgive me when I tell you its fundamentals don’t really matter to you, not until it starts paying out a much larger dividend anyways.
The only thing that makes you money with Apple (and most stocks these days) are the other investors out there, specifically those other people that buy and sell Apple’s stock. Buying Apple low and then being able to sell it higher to someone else is what makes up the vast majority of your yearly return in Apple’s stock.
Why waste your time with all these other talking points, when they don’t really help you take home more money?
The Beauty of the Markets
A stock’s price (QQQ) already incorporates everything in it. It includes the company’s revenues, the company’s earnings, even the salaries it pays its employees. It includes next year’s products as well as the insiders that are buying shares. It includes the share buybacks and even what competitors such as Google (GOOG) and Blackberry (BBRY) are doing. It even includes all the hype or fear. A stock’s price contains it all.
This is partly why following share price first and foremost should be an investor’s starting point.
What a stock price (IWM) provides that income statements, balance sheets, and cash flows will never provide, are also the sum of all emotions, expectations, thoughts and beliefs of all the other investors out there.
When Carl Icahn tweets that he is buying another $500 million Apple shares, he does it for a reason, and that is also reflected in the stock’s share price. His purchases certainly aren’t reflected in the revenues, earnings, or even shares outstanding of Apple, but they are incorporated into its share price.
Price encompasses much more than the fundamentals alone do and is why it is our starting point when analyzing an investment.
Following price along with sentiment (such as tweets by exuberant buyers like Mr. Icahn or the plethora of bullish news articles on why Apple will beat earnings) helps investors prepare for an entity that already has all the good news baked into it. When you combine such bullish exuberance (VXX) with technicals that suggest buyers are waning and sellers are stepping up, you get a wonderful short opportunity like Apple’s.
Apple’s price action warned us that the company was more than likely not going to recover its 52 week high at $575 as I outlined for subscribers on 1/5, “The Apple short continues to be a great trade, adhering to all kinds of technical sell signals”.
The chart below is one of many we provided to our subscribers throughout the last two months, helping explain why technically investors and traders were going to continue selling into Apple’s $575 price level. The technicals showed us that investors were bailing on Apple as it reached key resistance levels. (Some investors were “pumping and dumping” but never mind that.)
Utilizing technical analysis to decipher what investors were really doing helped us suggest multiple times shorting Apple’s stock as it rallied toward $575 (shown by the blue down arrows when we initiated sell suggestions in our twice weekly published Technical Forecast).
Those that followed the advice are now up over 10% as Apple fell 8% on its “lowered projections” earnings announcement 1/27/14.
Furthermore, bullish sentiment was sky high Apple heading into the end of 2013. Combine this with other technical indicators showing buyers were disappearing and $575 proved formidable resistance. (For more on my timestamped Apple short trade, see the video post published two weeks ago on 1/14/14 at ETFguide’s YouTube channel, titled Apple – A Great 2014 Short Setup )
Apple has now reached our first price target zone, an area where buyers and sellers decided that between $500 and $520 was a fair price for Apple back in October and November.
With Apple’s price now approaching $500 this means that everyone who bought shares since October is now losing money and may be looking to salvage positions. That means bounces likely will be sold. A break of key support at $500 will unlock further selling, likely back to the August and September consolidation range around $480 where I will continue to follow the technical setup to help warn of any further downside.
ETFguide utilizes technical and sentiment analysis to help decipher the key trends in the markets. These strategies helped us to pinpoint Apple’s top, along with actionable trades to take advantage of a trend that became a bonanza for prudent investors who were ready.
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