Apple Inc. (NASDAQ:AAPL) has been knocked from its perch as the market leader, and Wall Street is struggling with that fact. It should be, given the past success of the company — it has not only grown to the second largest company in the world, but it’s heavily held by mutual funds, exchange-traded funds, pensions and hedge funds.
Of course, the rationale for everyone holding AAPL stock is that it makes up such a large percentage of the very benchmarks that investors and portfolio managers are graded against.
Apple is roughly 2.5% of the S&P 500, 14% of the Nasdaq-100 and the top holding of a number of sectors. This, of course, validates holding AAPL for the indexed funds … but everyone else?
Maybe not, which is where the problem begins to emerge.
AAPL Stock Is the Most Crowded of Trades
We talk about crowded trades often as a warning, because investors don’t want to get caught in them. What’s a crowded trade, you say? Simply put, it’s a stock or sector that becomes so swelled with bullish investors that it is hard to make it move any higher, simply because the bandwagon is full.
AAPL stock has faced this risk for years as analysts have piled into bullish opinions, and why not? Apple sells a lot of its product. The iPhone revolutionized the smartphone, and it was borne of the iPod, which also revolutionized the music industry. Apple hasn’t always been an innovator, but investors have been rewarded all the same.
Now, however, it appears that Apple stock is in the process of a potential metamorphosis as rumblings of a service focus instead of products focus are being passed around.
CEO Tim Cook went on the offensive last week to shore up the selling of shares, but was the message really what we needed to hear? Not from our perspective — which honestly may not matter, but it does give us reason to think that AAPL stock is heading lower before the pain is over.
Currently, 81% of the analysts that follow Apple stock have it ranked a “buy,” which puts it in our “crowded trade” category. Historically, a stock in a bull market can withstand being overcrowded based on one of the oldest technical analysis rules out there: “The trend is your friend.” Of course, what investors need to worry about is the point where the trend is no longer your friend — when someone shouts “fire” in a theater full of bulls, causing a panicked run toward the exits.
Well, according to the charts, the trend is no longer Apple’s friend.
Apple’s Chart
As you can see in the chart below, AAPL stock has moved into a bear market pattern not just from a fundamental perspective, but from a technical one too.
Technically, when a stock moves below its 20-month moving average, it is considered in a technical bear market. Chartists often use the “20% from its highs” rule of thumb, which Apple shares ripped past in August, then again in December 2015.
Now, a new trend could be emerging — one that bear-minded traders and opportunistic buyers alike should be aware of.
The last time AAPL stock saw a decline this bad was from September 2012 through April 2013, when the stock lost more than 40% of its value. The percentage of analysts recommending Apple stock as a buy when this decline initiated: 87%. (No surprise to us!) Ultimately that figure had to drop to 75% before Apple could start climbinb from that hole.
During that pullback, AAPL also broke into a bear market, but one thing held on the technicals. Through this routing, Apple stock remained above its 50-month moving average. Normally, we don’t look at a trendline this long, but as chance would have it, this same trendline is currently “in play” on Apple stock right at the $92 level.
What’s Next for AAPL Stock?
First, we expect to see some analysts shaken out of Apple stock over the next few months as they come to grips with the seemingly possibility that Apple Inc. is making a transition from a growth company to a dividend-yielding value stock.
Remember: A lot of investors consider this company an innovative growth company. This paradigm shift would raise concerns and likely downgrades.
Next, the charts are likely to be in charge of Apple’s destiny over the next few months. A break below the $90 level is going to open up some room for the sellers to start exiting long-term holdings as they take profits from the table and try to sidestep more volatility and selling.
From there, the charts look to aim for a next level of support at $80, where a lot of value investors would start grabbing shares. After all, it would be yielding nearly 3% and sport a price-to-earnings ratio that would be about 50% lower than the S&P 500.
Bottom line: The crowd appears to be exiting the shares for the time being, which means that the idea of being a buyer is like trying to walk into the theater doors that everyone is running out of.
Wait for the crowd to clear and the technicals to shore up before grabbing AAPL stock. Your patience will be rewarded.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
