Rotten Apple?

09/19/2017 2:51 am EST

Focus: TECHNOLOGY

Joon Choi

Senior Portfolio Manager, Research Analyst, Signalert Asset Management LLC

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.


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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.


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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.

chart 1

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.

chart 2

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.

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