After falling more than 38% from its high, many investors are
now wondering whether
is a buy below $500. From a trading perspective, the answer is
"no," and the only reason to think about
buying Apple after such a big drop is based on
Fundamentalanalysts base their buy and sell decisions onearnings
,cash flow or other valuation metrics. The logic is appealing. If
astock is trading at $10 a share and has earnings of $1 a share,
for example, then the price-to-earnings (P/E ) ratio drops to 5
from 10 if the price falls by 50%. A stock that was a "buy" at a
P/E ratio of 10 must be an incredible bargain when the P/E ratio
falls to 5, right?
Sometimes, this logic works. At other times, buying is a mistake
because the stock is headed towardbankruptcy . And once in a while,
the big drop is followed by an extendedconsolidation period where
the stock price goes nowhere.
This last scenario describes
Netflix (Nasdaq: NFLX)
, which suffered a steep drop at the end of 2011.
The most important lesson Netflix offers potential
Apple stock buyers is not to rush. Netflix fell for an
extended period of time, and for months, technical and fundamental
indictors showed the stock was oversold.
After the initial decline ended, prices bounced higher, but then
fell back toward the lows seen in the sell-off. While the bounce
in Netflix seen early last year was tradable, anyone who
held on too long saw their profits dwindle away.
Interestingly, Netflix has been among the biggest gainers
in the past two weeks, andrelative strength (
), shown at the bottom of the chart, offered a timely "buy"
The next chart shows Apple, which in some ways looks
like Netflix did in 2011. Any number of indicators could
be added to the Apple stock chart to show that it is oversold.
The P/E ratio is shown in the middle of the chart withBollinger
Bands . When the P/E ratio falls to the lower Band, a stock is
consideredundervalued as Apple is now. By this
measure, Netflix remained undervalued for most of
The RS indicator at the bottom of the chart shows that Apple is
among the worst-performingstocks in themarket right now.
RS shows when one stock or exchange-tradedfund (ETF ) is
outperforming others. When looking at relative performance, the
question for traders is not, "Is Apple a good buy or not?" Although
based on the low P/E ratio, Apple is probably a good buy. The
question should be, "Is Apple the best stock I could buy
now?" Based on RS, it is not.
The final chart below reinforces this answer.
Apple makes up more than 13% of theNasdaq 100 index , which
is shown as the yellow line in the chart above. The purple line is
the sameindex with Apple removed.
Without Apple , the index would be at a52-week high .
Most stocks are doing well while Apple is not, something
few investors would have thought was possible
when Apple was trading near $700 a share last summer.
With so many stocks going up, investors should resist the urge
to buy and hope for a bottom with Apple. There are many other
stocks to buy now, and Apple's RSwill turn up when it is
time to buy that stock.
Action to Take -->
As an alternative way to increase exposure to tech stocks, consider
First Trust NASDAQ-100 Equal Weight Index (
. As its name implies, this ETF equal weights the components of the
Nasdaq 100 and is not as vulnerable to weakness in any one
This article originally appeared on ProfitableTrading.com:
"Is Apple a Buy Right Now? This Indicator Says,
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