09/19/2017 2:51 am EST
The technology sector seems to be the darling of 2017; however, I see signs that Apple (AAPL) may be headed for trouble during the next 3 to 6 month stretch, cautions Joon Choi, contributing editor to Signalert's Systems & Forecasts.
Lately, I have read many articles regarding how Apple will continue to march higher and soon reach the $200 milestone within the next few months. No doubt that AAPL is one of the best investments this year. However its valuation may be stretched.
At the end of August, Apple reached a P/E ratio of 18.6 which is the highest level since 2009. The stock price is down 3.2% this month which may indicate Apple may have gotten ahead of itself.
As shown in Chart 1, negative divergence formed between the weekly Apple price (Point A) and its 19-39 week MACD (Point B) in 2012; which prompted a 54% sell off during the ensuing 7 months.
As of last week, Apple’s price (Point A in Chart 2) and its 19-39 week MACD (Point B) completed yet another negative divergence.
What is worrisome is that the stock has a higher valuation now than back in 2012 which is evident in the higher P/E ratio; 18.6 vs. 16.8 respectively.
Another similarity between today and 2012 is that investors drove up the stock prices. As of September 19th 2012, Apple was up 74% for the year compared to 18% for S&P 500 Index.
That’s over four times the benchmark’s return (performance ratio of 4.1). Similarly, Apple was up 43.4% year to date as of August 31st 2017 (its highest close this year); which is 3.7 times more than 11.7% gain for the S&P 500 Index.
The weekly price and MACD divergence completed on September 28th 2012 and fell seven consecutive weeks until November 16th. During this period, Apple fell 20.5% and SPY sold off 5.3%.
Although SPY recovered from losses and ended the year almost flat since its bearish formation (down 0.4%), Apple finished the year down 19.9% for the same period.
The negative divergence formed in the Apple’s weekly chart may be a precursor of a significant selloff. This type of bearish formation is rare for Apple and it offers an opportunity to profit from short selling.
I recommend selling at least some, if not all, positions in Apple as I believe we will see a 20%+ correction in the next few months (support level at $120).
If you would like to maintain your equity exposure, then replace AAPL with SPY. Note that the last time when I wrote about Apple forming a head and shoulder top (yet another bearish chart pattern) in 2015, the stock fell 16% in three months.