Shares of Apple (NASDAQ:AAPL) have certainly bounced sharply off their early January lows. Apple stock is now up over 16% since closing at $142.19 on Jan. 3. While some of the prior selloff was certainly overdone, the rally is now getting overextended in a similar fashion. Time to short AAPL.
Apple reported earnings on Jan. 29 that were largely in line with expectations. Earnings-per-share came in at $4.18 versus expectations for $4.17. Revenues were also a touch better at $84.3 billion compared to consensus of $83.97 billion; iPhone revenues actually missed at $51.98 billion, below the expected $52.67 billion. This was the weakest beat in the past four quarters for a company accustomed to beating estimates. Certainly not a fabulous report, yet Apple stock skyrocketed on the news.
The company did issue a revenue warning back on Jan. 2, lowering revenue guidance to $84 billion versus prior projections of $89 billion to $93 billion. This tanked the stock sharply. AAPL stock traded down from a closing price of $157.92 before the announcement to $142 the day following the news. The revenue warning did indeed prove to be spot on, with AAPL reporting the aforementioned $84.1 billion in sales. Yet somehow, AAPL stock has is now actually up 4.5% since the revenue warning.
I guess lower sales are bullish.
In my appearance Jan. 3 on the TD Ameritrade Network, I liked Apple stock following the revenue warning. The stock was trading just below $143 at the time and I recommended a bullish covered call strategy. My thesis was that the selling had gotten overdone and that AAPL was looking cheap.
How to Approach Apple Stock Now
Now that shares have ripped higher, my bullish viewpoint has changed because price does matter. Apple is now looking overbought and decidedly less attractive on a valuation basis. A higher stock price with no change to earnings means a higher price-to-earnings multiple.
AAPL stock is getting extended on a technical basis as well. Shares are now at nearly the highest MACD readings in the past year. Apple is also trading at a big premium to the 20-day moving average, a sign of overexuberance that has been a reliable bearish indicator in the past.
The price action from yesterday was also symbolic of a short-term top. A doji pattern emerged, as AAPL stock traded up to $169 on the day before reversing to close sharply lower and near the opening price of $166.11. This type of reversal pattern is many times emblematic of a short-term top, with the buyers finally becoming exhausted after such a monster move higher.
Investors and traders looking to add a short to their portfolio should consider shorting Apple stock near current levels. My initial downside profit objective is a move back to the 20-day moving average of $153.98. It’s important to remember that Apple goes ex-dividend Feb. 8, with a dividend of 73 cents and anyone short the shares on that date is liable for the dividend.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.
