It's been one of the greatest longs in the history of investing,
but it looks as if the run in Apple could be finished for now.
The last two months of selling seem very different from other
pullbacks in this stock, which has been rallying since its iPod MP3
player took the world by storm in 2003. It's been steady and
unrelenting, like water being drained from a tank.
My view is simple: Major institutional investors are now unwinding
long-term positions initiated years ago. They're probably long from
$200 or less and are happy to get anything more than $500.
As the technicians would say, AAPL is going into "distribution." I
expect bounces to be short-lived and met with selling. Good news
will be ignored and bad news will be expected. Valuations will look
alluringly cheap but are more likely to be a value trap than a real
The main reason I am so bearish is that AAPL so quickly fell
through its 100- and 200-day moving averages in the last month.
Those levels had provided support at various times since early 2010
as the stock ascended from about $200 to over $700. They've now
been essentially erased.
The second reason is that the charts have been showing so-called
bearish divergence, with the MACD indicator falling as shares
pushed higher in recent months. This suggests that momentum is
slowing. It also came at the same time that the stock failed to
hold the key $700 level, a so-called "false breakout." These two
events at the same time don't augur well for the bulls.
Another reason is found in
from July, when I recommended the stock based on it consolidating
above a key trend line. If you now extend that line, it points
below $500. By the time it's reached, it could be much lower.
The last reason is that the fundamental story has been weakening.
The last two earnings reports were mediocre, with weak guidance.
The company's suite of products has also been gaining market share
much more slowly than Google's Android devices, and its magic
hasn't been working in China. AAPL still has plenty of fans in the
United States and Europe, but after almost a decade of rehashed
iPods, iPhones and iPads, how much more growth does the story have?
So my belief is that AAPL may bounce from here or could keep
dropping. If it rallies back to the $585 area, I think it's a
short. I believe that it could go as low as about $420 to $440 in
the next year. That was resistance in late 2011, and then it leapt
from there in January. The gap could very well be the destination
of the current move. My prediction would be invalidated if AAPL
closes above $600 for more than a week.
There are two other names that could also head lower: Lockheed
Martin (LMT) and Raytheon (RTN). Both are near recent high levels
and face weaker business in coming years as Congress scales back
spending. LMT had bearish
yesterday, in fact.
One company to consider from the long side is Legg Mason (LM), a
mutual-fund operator that's been bleeding assets for the last
decade. Management reported an inflow last month, and the stock has
been quietly working its way higher for the last month despite
weakness in the broader market and the financial sector.
were active in LM on Monday.
(A version of this article appeared in optionMONSTER's
What's the Trade?
newsletter of Nov. 14. Chart courtesy of