Apple (NASDAQ:AAPL) shares closed at a fresh new all-time high yesterday. The latest move higher was based on news that famed investor Warren Buffett said he added to his already gargantuan stake in AAPL stock.
Apple has now rallied 18% this month since reporting earnings on July 31 that were good, but not that good. So while the upside momentum appears to be unabated in AAPL, there are three reasons to begin to be wary of the recent red-hot rally in Apple.
Three Reasons AAPL Stock Requires Caution
Many, including Mr. Buffett, point to the relative cheapness of AAPL stock as a major reason to own it. Important to point out that Apple is now trading at its highest price-to-earnings ration (20.3) since 2009 with a multiple that just exceeded 20. It is also well above the five-year-average of 14.1 and also fast approaching the overall market multiple of 20.7.
Similar metrics, such as price-to-sales and price-to-book, are also at extremes on both an actual and comparative basis. The dividend yield has fallen to just 1.2%. Following the recent rally, AAPL stock is certainly no longer cheap.
To say stock in Apple is overbought would be an understatement. Its 9 day RSI is at the highest levels of the past year with a reading well over 80. Previous instances when Apple stock was this overbought proved to mark significant short-term tops in AAPL.
Apple is also trading at a major premium to the 100-day-moving-average at $190.94. Prior times when AAPL stock traded too far above the 100-day-moving-average led to pullbacks in the stock.
Most importantly, yesterday’s price action finally signaled that the rally may be getting overextended. AAPL stock traded sharply higher to an intra-day high of $228.26 before reversing course and closing well off those highs at $225.03. This type of reversal pattern, especially following such a strong rally, many times is a sign that the buyers may finally be exhausted.
Apple is the largest U.S company by market cap, which now stands at $1.08 trillion. The sheer size of AAPL makes growth more difficult simply due to the law of large numbers. Profit margins have fallen sharply, meaning Apple will have to generate even more revenue to reach similar earnings. Given that price-to-sales is already at an extreme, the sheer enormity of sales growth needed to sustain the near parabolic recent rise in AAPL stock seems like a mathematical impossibility.
Implied volatility in AAPL options is at the 49th percentile, meaning option prices are about average in price. This makes option buying strategies still viable. So to position for a pullback in AAPL stock, a simple put purchase makes sense.
Apple Stock Trade Idea
Buy AAPL Sep $225 puts at $4.40.
The maximum loss with this trade is the premium paid of $440-per-contract. Intrinsic break even on the trade is $220.60, which is 2.2% lower than the $225.03 closing price of AAPL stock.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility.