Earlier this week, Apple (AAPL) reported earnings that exceeded street forecasts, resulting in an immediate pop in the stock. There has, however, been no follow through in terms of the price, with much of the gain being given back the next day. This re-enforces the belief that, after years of being the darling of the markets, AAPL is stuck in a rut. So why would anyone want to buy AAPL?
There are, of course, several reasons. Apple is still a great company and the stock has dropped 30% since a year ago and lost 40% versus the all time high. Even with reduced expectations the stock is trading at a discount to the S&P average, with a forward P/E around 10. It is possible that earnings could surprise, or that the subsequent call could reveal details of another stunning product, giving the stock a boost. Any move to the upside could well be re-enforced by existing holders, looking to average underwater positions. Sound reasons one and all, but you should never buy a stock on the way down. Attempting to find the bottom can be as dangerous as trying to catch the proverbial falling knife.
Of course, the logical question is then “How do you know when a stock has stopped going down in price?”
At VectorVest we have the RT* (Relative Timing) indicator that gives us that information. A stock’s price is trending higher when RT has a value greater than 1.0 and lower when the indicator is under 1.0. Many of our subscribers look for trends within the RT, rather than using crosses of 1.0 as an absolute signal to buy or sell. Let’s see how it works by looking at a daily, 1 year chart of AAPL.
The high of the RT was at 1.29 on September 15th last year, three days before the stock began to fall. Once the decline started, the RT fell rapidly as well, falling below 1.0 on October 8th 2012, when AAPL closed at $638.17 per share. The drop continued until RT hit a low of 0.61 in November. After that low was touched for the third time in December the chart for RT (lower line) shows a series of higher lows, leading to a current reading around 1.1.
I Even with the better than expected earnings and an RT over 1.0, I’m not convinced yet that AAPL is a buy. Should the stock start moving up, the acid test will be when the 50 day Moving Average (currently around 425.5) approaches the 150 day MA (around 434). There is bound to be some resistance when that happens, but, should the short term average cross the long term, that will be the time to buy AAPL. Patience in this case is indeed a virtue. You will no doubt miss the absolute bottom, but it is better to buy any stock when momentum shifts to the upside. In the case of an undervalued, highly covered stock this is even more so. Wait a while and let the trend be your friend.
*For more information on RT and our other proprietary indicators and a special trial offer, click here.