Jan 132013

Background: If you are unfamiliar with my concept of CPE (Continuous P/E), please read my CPE Explanation Page before continuing with this post.

Let’s review the overall themes of the analysis for this quarter, and the conclusions we have been tracking for this quarter. The analysis for these positions can be found in earlier posts during the past few months.

  1. This is a low valuation quarter. AAPL will be seeking out and confirming a valuation base.
  2. AAPL time cycles are down into mid January. Valuation weakness should continue through to the end of quarter (I measure quarters from earnings release to earnings release).
  3. AAPL will close the quarter near the CPE lows for the quarter. See the analysis “End of Year Valuation Weakness” in the December post.
  4. The final two weeks leading up to earnings should be sideways to down, as has happened for the past 4 quarters.
  5. The bottoming process will be complex.
  6. Whack-a-mole price action will dominate. Every time AAPL price pokes its head above ground, it will be whacked back down. This has proven true on the daily chart, with many gap up opens, strong closes, and many intraday price spikes.

These overall themes have served us well over the past several weeks. And now we are in earnings season, with AAPL reporting in less than 2 weeks. The price action leading into earnings will be dominated by trader actions reflecting the emotions of uncertainty of imminent earnings release. So can we gain an advantage amid that uncertainty? Yes, with my Earnings Beat Analysis:

Earnings Beat Analysis

My Earnings Beat Page analyzes the statistical variance of past earnings releases, and charts the results against my own indicator predicting the likelihood of an earnings beat this time. We have reasonably high confidence level that AAPL will beat current analyst consensus. My own Jan earnings estimate is 15.52 on revenue of 58.5 Billion.

There is also an interesting phenomenon regarding the difference between the Jan/Apr earnings reports and the Jul/Oct earnings reports. Notice on the Earnings Beat data scatter chart, the Jan and Apr earnings data points are all grouped in the upper right, with greater predictability of results and lower variance. The Jul and Oct results are more scattered, less predictable, and have greater variance. AAPL has also never missed in a Jan or Apr earnings report. My guess (and it’s just a guess) as to why this is so is because Jan and Apr are Apple’s stronger quarters and are more supply constrained. Apple is able to run a tighter ship with more predictability during these quarters, therefore the earnings results have less variance and are more predictable.

AAPL Growth

The new AAPL Growth Chart shows the extent to which Apple’s growth has dropped in the recent few quarters. This is what I believe is the reason AAPL price has dropped so much recently. AAPL is about to have the slowest TTM Earnings Growth of the past several years. Everyone knows it, and is anticipating it. The chart shows how quickly AAPL has moved from the area of 95% TTM growth to under 20%.

But there’s an explanation. It’s because last year Jan and Apr were so strong, so they make tough comparisons for this year. If we look even further ahead, the Jul and Oct earnings reports in 2013 will have easy comparisons to 2012. So TTM Growth has a good chance of recovering in the second half of 2013. I believe this phenomenon will dictate the general shape of AAPL intermediate price swings in 2013. This would mean the latter part of 2013 will contain stronger price action with steeper sloped CPE lines and a steeper sloped Valuation Range channel. We will keep an eye on this as our larger picture expectation takes shape over the course of 2013. This hypothesis is also supported by the AAPL time cycles.

AAPL Time Cycles

AAPL price action is tracing out a symmetrical time cycle price pattern centered on the all time high at 705 near the end of September. AAPL spent 8 weeks in a strong rally leading up to that peak, and then spent 8 weeks in a strong decline off that top. Before all that, AAPL spent 10 weeks coming off the May 2012 bottom and before that 8 week acceleration began. We are now within the corresponding 10 weeks of valuation basing action. This is the #2 item listed at the top of this post, indicating that time cycles are down into mid January. The turning point of this time cycle is during the week of earnings. From the bottom that occurs between here and the end of January, we can expect a rally until the end of February or beginning of March. The size of that rally is expected to be in the range of 100-150 points. That represents about 2.5 to 3.0 CPE levels of rise, which is the typical CPE range trading range from 2011, a range I expect AAPL price action to reassert itself during 2013. I will fine tune that projection once earnings are released. The specifics of this new analysis will depend on where the new CPE lines are drawn and the slope of those CPE lines. Lastly, following the valuation high next quarter, the price cycles tell us to expect a drop to retest the valuation lows from this quarter, sometime during the spring. That will complete the year long consolidation of the early 2012 strong rally. That rally was so strong, it is not surprising that we should expect a full year consolidating those gains. The fact that it will likely be a full year of consolidation relates closely to the AAPL Growth analysis in the previous section: One year of predictive time cycle price action. One year to get beyond the tough comparison of the strong Jan and Apr 2012 earnings reports.

Short Term Expectations

Item #4 at the top of the post should continue to control price, and prevent AAPL from going on a big rally leading into earnings. AAPL should be sideways to down during the 2 weeks leading into earnings. That is what has happened the past 4 quarters. With the uncertainty, and the fear of another miss, and a fear of year-on-year earnings decline, price should remain under pressure. That much should be expected. But under how much pressure? Well, I don’t have high confidence in the answer to that. However, I do have some speculation, and an opinion on a what-if scenario:

There is reasonable possibility AAPL will plunge in the final few days before earnings. Many weak hands would be shaken out. There are a lot of new long positions that have been opened during the valuation basing action between CPE 11.1 and 11.4. Those new positions, if held with low conviction, may be shaken out.

If there is a new CPE low in the final days before earnings, I will not put much importance on those lower CPE valuation levels. That’s because a new valuation reality will take hold immediately after earnings. The lower valuation levels below CPE 11.1, should they occur, would be due to valuation uncertainty and fear, and be replaced very soon after with valuation reality. For this reason, the amount of decline that is possible in the final days before earnings could be considerable without doing lasting damage to the valuation floor that has already been created at CPE 11.1-11.4.

Update:  Mon Jan 21

AAPL goes as planned.  We got our plunge during these final two weeks, which surely shook out some weak hands this past week.  The weekly bar is a nicely formed reversal bar that closed almost exactly where the week opened.  The week started with a big gap down.  Wouldn’t it be a beautiful formation if AAPL gapped up this week, leaving all last week’s selling as trapped money.  As mentioned in an intra week update on the AAPL Beat Forum, I’m expecting the day of earnings, this Wednesday, to be a down day.  The day of earnings has been a down day each of the past 4 earnings releases.  I’d like to see Tuesday be an up day, giving room for Wednesday to be down while still staying above last week’s range.  I don’t have any analysis about tomorrow’s trading — just saying what I’d like to see based on how the price patterns are forming in these final days before earnings.

No change to the Earnings Beat analysis.  Still expecting a good beat on earnings.  With AAPL below short and intermediate term moving averages, any earnings release seen as good or better should result in a gap up in price, and kick off the expected multi-week rally.  I added revenue projections to the earnings expectations mentioned higher in this post.

Following earnings, all the current quarter’s CPE lines will be adjusted to reflect reality rather than my projections.  My new projections for next quarter will also adjust the CPE lines going forward.  Lastly, actual earnings results may adjust my targets for the next intermediate term swing high expectation, which currently is for a target near 590 around March 1.  Blowout earnings would adjust that expectation higher in price because the CPE lines would be adjusted higher.

Update: Wed Jan 23 – Earnings Released

Charts have all been updated reflecting the just announced earnings.  A few things in particular I want to note this evening.  I hope to write something longer this weekend.

  • Year on year earnings growth was 0.  That means the CPE line was actually flat for last quarter, not the slightly positive slope I had modeled.  You can see this best in the CPE Weekly Chart.  Also on that chart, note the CPE lines will remain almost flat for this upcoming quarter, according to my preliminary earnings estimates for this quarter.
  • Now, compare the slope of the CPE lines to the lines on the CPCash Chart.  Cash per share jumped a whopping $17 this quarter!  The slope of the CPCash lines are very steep.  Apple is a cash generating machine.  Impressive.  I want to examine this valuation metric in more detail this quarter.  There’s something going on here that most people are missing.
  • The price low last week at 483 occurred at what was thought to be the CPE 10.6 valuation level.  The new CPE 10.6 level (after accounting for actual earnings) is now at 467.
  • There is still a valid Fibonacci target at 471 that we never reached last week.
  • Therefore, considering the above two data points, I will be looking for a low tomorrow near 467-471, marking the cycle low I am looking for.  Yes, I realize price is currently under that price this evening.  The current price this evening is too low.  I’d like to see price be higher tomorrow morning to validate this valuation low analysis.
  • The AAPL time cycles have always been predicting a valuation swing low this week.  We now know the low is after earnings, not before.
  • I am still expecting a multi-week rally of approximately 110 points from whatever low we put in here.  That has not changed.  If the low comes in near 467, that means I will expect a valuation high this quarter near 577 around the end of February.  The time cycle analysis has not changed, and is still entirely valid.  It’s just the price levels for the low and the high that have changed due to the unexpectedly low earnings results.  This will be very interesting to watch for the rest of the week and next week.  (Update Two Days Later:  Read my next post about “revaluation”.  After seeing the trading activity following earnings, I have modified this expectation somewhat).