Three Reasons Apple (AAPL) Refuses to Rise

This afternoon (Tuesday) Apple (AAPL) will release their Q3 results. I have no crystal ball, so will not be making any detailed predictions regarding the announcement, even in relation to projected earnings of $7.31. Instead, I wanted to take a look at a question that puzzles many; why won’t AAPL go up? From a rational, non-market perspective, it would seem that the stock must be poised to take off any time now, but this has been the case since at least the lows back in April and maybe since AAPL first broke through the $500 level in January.

The case for a jump sometime soon is fairly well known. Apple has been phenomenally successful. They have a vast store of cash, more than the rest of the S&P 500 combined. They have great customer loyalty. They are, despite a proven growth record and continued huge sales, trading at a discount to the rest of the S&P in multiple terms. The current price, even ignoring that huge hoard of cash, reflects around ten times projected earnings. Logic tells you the stock is undervalued and must go up, but, for now at least, it refuses to. So what gives?

I believe there are three basic reasons that AAPL is languishing. They may not be as logical as the case for, but when taken together they have been powerful enough to hold the price down.

Perception Is Reality

Part of the problem is that, while AAPL’s results haven’t been bad, they haven’t been as good as expected. Growth is still evident, but slowing, and margins are tightening from their previous high levels. The company is still growing, and still making great money, but the perception is that the luster is fading.

I wrote here about another perception problem. This admittedly anecdotal evidence suggested to me that people were beginning to see the company’s product line as old, and their focus on selling the brand as being a poor substitute for new products. My conclusion that AAPL would continue to underperform was questioned by some, but over a month later, the stock is down around 1% while the S&P is up around 4%.

The perception is that, without Steve Jobs, the company has lost its innovative flare and its passion. Tim Cook may well be a great CEO but he is not, nor ever can be, the iconic figure that Jobs was.

These things, taken individually, are somewhat questionable and even if true, no one thing should hold the stock down in the face of the numbers, but they do. When combined, they result in the perception that Apple is somehow failing, a claim that is obviously nonsense. In this case, as evidenced by the stock price however, perception is reality.

AAPL Has Become A Trader’s Stock

For years, AAPL was the darling of mutual fund managers and long term investors, but held little appeal for traders. A steadily rising stock is a great thing, but the lack of volatility that makes it so appealing to the investor is the very thing that makes it of less interest to traders. That has changed over the last few months.

AAPL has become a trader’s dream, bouncing around in a range roughly defined by the $400-$450 levels. The problem for the stock in the short term is that, as it approaches that $450 level again there will be significant sellers and the resistance to an upward move could well be strong.

This renewed interest in AAPL from traders also leads to reason 3.

The Technical Outlook Is Scary

Let’s get this straight. Technical indicators for an individual stock shouldn’t matter one iota to long term investors. They are a trader’s tool, used for short term analysis. There is no magic to most technical indicators, regardless of what some would have you believe. They work only insofar as people pay attention to them. If technicals point to a move down, it only happens if enough people notice and actually sell the thing.

That said, once a stock becomes of interest to traders, rather than investors, they begin to matter. Put simply, the chart above shows a narrowing wedge over the last few months, where the steeper line is on top, indicating lower highs. This points to a possible breakout to the downside in the short term. I am not saying this will happen; just that if enough people believe it will it makes movement to the upside tougher.

None of these things is fair. The fact that so many people are getting the wrong message and that traders after a quick buck are pushing the stock around just shows to the true devotee what a great buy the stock is. This may be the case, but, unless today’s call contains a major surprise about an upcoming release (not just another re-work of existing products) then I still believe the stock will underperform in the coming months. Eventually, these levels may well look cheap, but as long as the three reasons remain valid, there will be better places to put your money.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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