Credit: Shutterstock photoA couple of weeks ago, on the day that Apple (AAPL) launched their new suite of products, I wrote this article, which laid out a strategy for traders and investors going into the event. The basic message was that the price point of the iPhone X would exaggerate and prolong the selling that often follows Apple’s product launches, but that at some point the stock would recover and the drop would become just a great buying opportunity.
That point has arrived.
Once momentum, either up or down, has been established in a stock, a change of direction usually comes in one of two ways. Either there is one big news event that changes everything or, more frequently, there is a confluence of small things that gradually shift the overall mood.
In this case it is the latter. Several factors both chart-based and fundamental are coming together to make a recovery and progress to new highs much more likely than any further declines over the next few weeks.
Let’s start with the chart. As I pointed out in the previous article, the decline in the stock was already underway when the announcements came, but if we take the drop from the actual high of 164.94 to Monday’s low of 149.16 it represents a retracement of just below 10%. There is nothing magic about that number, but common-sense dictates that those like me who were anticipating a negative reaction to the launch would have told themselves that they would be happy with a retracement of around that amount.
Add in the fact that the low is also the pre-earnings high from which last month’s strong gains were launched and somewhere around 149 is a logical pivot point.
Still, momentum can be a powerful thing so no matter how tempting a level is, it is always better to wait for confirmation of a turnaround than jump in early in an attempt to pick the absolute extreme of the move. The bounce that we have seen in the last couple of days confirms that momentum has halted and quite possibly reversed, making now a good time to take advantage of the drop to buy AAPL at a discount.
Of course, none of that matters if fundamental factors are conspiring to push the stock lower, but that is not the case here. The negative reaction to the new products followed a time-honored and predictable pattern, but the second leg of that pattern has always been a recovery.
There is always some doubt that Apple’s new models will sell, but once numbers become known, that has, in the past, been shown not to be the case. The argument is always made that for some reason or other this time will be different, yet here we are, retracing off another all-time high.
Numbers for the new phones should therefore provide long-term support, but to make this the ideal entry point, we would be looking for another, more short-term positive influence. That will come today, when President Trump gives at least a little more detail on his tax plans. Reports are indicating that the aim is to cut corporate taxes to twenty percent and allowing an amnesty for the repatriation of profits held overseas has been mentioned many times by the President and Congressional Republican leaders alike, so will probably also be a part of the plan.
It doesn’t take a genius to understand that, for a company with a massive overseas presence and that measures its total tax bill in the billions, both of those things would be a positive. The repatriation of profits even hints at the possibility of a special dividend or some other shareholder friendly use of some of those funds, something that doesn’t have to actually occur to give the stock a boost. Just the thought of it will be enough.
All in all, while the ten percent decline in AAPL was understandable, even predictable, everything now points to it being over. What investors should be focused on from here is that, despite proving time and again that it shouldn’t be, AAPL is once again trading at a significant discount to the average trailing and forward P/Es for the S&P 500. That means that it is, to put it simply, cheap at these levels.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
