Sep 052015
 

Following up on my last post: Not only did we get a slightly lower low, but then the market did fall apart shortly thereafter, taking AAPL into a panic deep dive to 92. That was much lower than I thought possible. The most important aspect of that dive to 92 is how quickly price recovered higher. As I annotated on some of my charts, AAPL spent only 8 minutes under 100. That’s a firm rejection of a share price that low.

So we now have three weeks at these low valuation levels. AAPL is “Finding Valuation Support”. To the extent that the overall market remains under pressure, AAPL will too, in search of reinforcing the valuation support levels being created now. So what can we learn about the level of valuation support that has been created so far over the past three weeks:

First up, let’s look at the CPE Charts. Notice how many days have bottoms near the CPE 12 level. We can ignore the panic bottom day, with the deep dive to 92. More important are the lows under normal market conditions. And we have evidence that CPE 12 is valuation support.

Next let’s look at whether CPE 12 has historical significance by examining the Valuation Range Chart. The answer is yes. I even had CPE 12.2 already drawn in as valuation support from 2014. CPE 12.2 was the lowest valuation level during 2014, twice. Therefore CPE 12 as valuation support now makes sense.

Lastly, a quick look at my AAPL Valuation Model shows that this same valuation support level represents the bottom of my fair value range.

Looking forward: If CPE 12 proves to be support, CPE 14-15 should be reachable in the coming months. A CPE range of about 3 is common. That also represents the size of the fair value range in the Valuation Model.

Aug 052015
 

So here’s my take. I think this morning was the bottom. We may need a retest, and there’s always the possibility we make a slightly lower low, but in this case I don’t think so.

Most of my analysis is based on my continuous valuation charts, CPE and CFCF. There are no weak fundamentals to support intermediate term weakness in AAPL. So I see this decline as short term and technical in nature. AAPL may indeed trade at a lower valuation range now due to this decline, but the ramifications of that are still bullish from here. That’s because my valuation charts show the CPE and CFCF lines sloping upward rather aggressively. Why? Well because Apple’s growth is impressive, of course. The best growth in 3 years. Furthermore, that growth is still increasing. Solid earnings. First derivative, growth, is positive. Second derivative, change in growth, is positive as well. No one can possibly claim the fundamentals are weak with those stats.

So with steeply sloping valuation lines, it means AAPL price needs to aggressively rise from here to maintain a typical valuation trading range. Let’s look at what that means from CPE and CFCF perspective.

From a CPE perspective, today’s low is just below CPE 13. We should be able to make it back up to CPE 15-16. Looking at my chart that means a price of 140-150 should be reached within a few months. My chart (not updated with this week’s action yet):

AAPL Continuous P/E

From a Free Cash Flow (CFCF) perspective, the picture is even better. Today’s low is near FCF multiple of 9. That’s down near the valuation lows of early 2013 when Apple earnings and FCF had negative growth. FCF growth is now better than any time since then. Again, steep valuation lines. If we conservatively expect AAPL to go back to a CFCF multiple of 12 (the middle of the recent range before this week), then a price of 160-170 should be expected before year end. Here’s my FCF chart:

AAPL Continuous Free Cash Flow

So that’s what I’ve got. From a FCF perspective especially, AAPL valuation is crazy crazy low down here. FCF multiple of 9, even before subtracting out cash? That’s just crazy.

Update later that day:  The only way I see AAPL staying at these lower levels, i.e. not put in a bottoming formation near here, is if the whole market is in the process of falling apart. A market meltdown would keep AAPL price under pressure. Absent that, AAPL is just too compelling a valuation to stay at this level for long. It’s like trying to hold a balloon still, partially under water, while the water is rising. AAPL is now near FCF multiple of 9. At the end of the quarter this price level will be an 8 multiple. At the end of the year 7. Subtract out cash and the FCF multiple at the end of the year would be less than 5, maybe even close to 4! It’s an amazing and crazy valuation situation AAPL is in for the latter half of this year.

Jun 252013
 

Update Fri June 28: The scenario laid out in this post is now unlikely. The market did put in a short term bottom as expected according to item #4, but AAPL did not participate in the ensuing rally this week. So my #5 has been shown to be wrong. That calls into question the scenario in general. I am returning to having an open mind on AAPL. The rest of this post is left unchanged for reference purposes.

Current observations and guiding factors:
(I wanted to get this posted. I’ll pretty it up later and add links)

1) AAPL has an inverted H&S pattern since January earnings. The head is the price low at 485. There are two swing lows before that forming the left shoulder. There should be two price lows to the right side. We are now trying to form that second price low.

2) I measure AAPL valuation with my CPE levels. All the swing highs this year have been very near the same valuation at CPE 11.1. So that’s the ultimately critical valuation level to watch to confirm an eventual breakout to a higher valuation range later this year.

3) The swing low forming the second bottom of the right shoulder of the IHS pattern may occur at the same valuation level as the left shoulder bottoms. If this bottom were to occur at the same CPE level as the March low, it would be expected in the 390s.

4) My favorite market sentiment indicator to predict a general market bottom in an emotional selloff is to watch equity puts to open, and when that peaks. The market tends to bottom 3 days after that peak, +/- one day. Equity puts to open peaked last week Thursday. That means that as of now, I’m expecting a market bottom this week Monday, Tuesday, or Wednesday.

5) This AAPL decline is not from any AAPL specific news or event. It is along with the general market, so I’m expecting AAPL to bottom along with the market this time.

Put all that together and I am watching for AAPL to bottom somewhere in the 390s Monday, Tuesday, or Wednesday, and that will mark the nadir of AAPL valuation weakness and underperformance that started 9 months ago. Recovery from that nadir will be a process, start slowly, and build into later in 2013. The process will not accelerate until there is an AAPL specific catalyst, or an expectation of a time-specific catalyst.

To confirm, I will want to see AAPL outperformance, a big up day at some point, and AAPL price taking out some of the recent down trend lines, and ultimately exceeding the CPE 11.1 valuation resistance. Until that confirmation happens, this is just a roadmap expectation with enough likelihood that it gives me something to watch closely for.

Caveat:

With the recent bond market selloff and higher interest rates, equity fair valuations have been adjusted lower. Therefore taking out CPE 11.1 resistance will be more difficult.

Jan 272013
 

AAPL suffered a huge gap down after Jan earnings. The gap down was not immediately bought. The AAPL chart was already oversold on an intermediate term basis. Those three things combined means we need to step back a bit, look at the big picture in a holistic manner, reevaluating the landscape of technicals, fundamentals, and valuation. Let’s get started …

Revaluation, Not Capitulation

The gap down reaction to earnings was a sudden revaluation of AAPL, not capitulation. Capitulation is a TA term and comes about with increasing downside momentum as more and more swing traders throw in the towel, which spills over into longer term investors throwing in the towel on their positions, until finally all weak (and some not so weak) hands give up. That’s not what we just had. This huge gap down after earnings was a sudden revaluation of AAPL. It is based on fundamentals, the new earnings growth environment and uncertain growth prospects. It is a sudden and abrupt change in the AAPL valuation equation.

Yes, there will be some sort of technical bounce. AAPL usually trades in a range each quarter that is about 2.5 CPE high. With current earnings that means 110 points as a median expectation. I’ve been using that number a lot recently, talking about the size of the February rally I’m expecting. The problem we have at this point, however, is trying to figure out where that roughly 110 point range will take place. We could have a technical bounce in February and then make a lower low later in the quarter such that we don’t get a 110 point rally right now, but instead get a 110 point range for the quarter with the current price somewhere in the middle of that range.

Realizing this is a sudden revaluation of AAPL results in another important conclusion. In terms of the Valuation Range, we need to ignore the higher CPE levels seen in 2012. I had already come to the conclusion that the 2012 swings indicated a rejection of CPE 16 valuation, and that we would never return to those valuations again, and had included this analysis in some previous posts. The effect of this sudden revaluation means we need to pretty much ignore all previous valuation ranges and concentrate on watching for a new valuation range to be defined. For example, instead of a CPE range of mostly 13-16 in 2011-2012, we may now trade in a CPE range of 10-12.5, or 9.5-12. We should even consider something even lower. That’s because if there’s one thing I’ve learned about AAPL it is that it is common for something more extreme that I am expecting to happen. I do always like to maintain a median expectation, and I will come to a conclusion soon about the rest of this quarter. However I need to see more price movement in the coming days and weeks.

At the top I said this past week was not capitulation, it was revaluation. That means capitulation is yet to come. It could be short term, even this upcoming week, or it could be after a technical bounce in price and subsequent capitulation decline. I did a couple Fibonacci and measured move calculations to see what might be possible. I got 395 and 383. My first reaction to those numbers is to just reject them as too low. But then I take those numbers and add the expected 110 point range for the quarter and I get 505 and 493. Those make some sense as an expected trading range high as those would fill the earnings gap. There would be a lot of long term and intermediate term sellers near that level, and therefore an expected resistance level. So maybe all these numbers do make sense: 383-395 on the low end to 493-505 on the high end (483 area might prove more significant). That would mean we see CPE 9. I still have a really hard time believing that. Maybe as part of a V bottom capitulation selling is how that valuation level would occur. This is meant as speculation, as thinking out loud, if you will, trying to fit together the puzzle pieces we have been dealt and generate some expectations.

It’s worth mentioning the AAPL Time Cycle analysis from recent weeks’ posts. It calls for a bottom of significance during the week of earnings and then a top of significance during the week ending March 1. So far this analysis remains valid. It bears watching for further confirmation from the price action.

Let’s now step back and look at the big picture for some perspective:

The Big Picture: Growth, Free Cash Flow, and Long Term Valuation

Apple’s growth has been strong for several years. And has declined rapidly recently. This wasn’t a surprise. My Earnings Growth Chart projected this drop in earnings growth. Declining growth deserves a lower earnings multiple. A lower P/E multiple combined with flat CPE lines (see CPE Weekly Chart) opens the door for a significant price correction — a revaluation. Declining growth supports the AAPL decline. It is one of the primary reasons for it.

One number in the Jan earnings report that stuck out was the large increase in cash. I dug deeper and noticed the strong cash flow. This convinced me it was worth the time to create an additional Continuous Valuation Chart. Check it out: Continuous Price / Free Cash Flow (CP-FCF). Some things to note: Free Cash Flow remains strong. The occasional quarters with flat or declining FCF lines are those quarters where Apple had especially high CapEx spending. Apple has spent an extraordinary amount on CapEx for the quarters ending Sep 2011 and onward, and it remains high and growing. Tim Cook is an operational savant. We have to assume the continued CapEx spending is in anticipation of continued growth of free cash flow. The CP-CFC Chart is especially useful to illustrate recent over-valuation and under-valuation. What FCF multiple looks to be the most accepted valuation for AAPL over the past two years? My answer would be 10 to 14. Now look at the Aug-Sep 2012 rally. From a FCF multiple standpoint, that rise and fall stands out as an out of the ordinary over-valuation. Similarly, the drop since Jan earnings release stands out as an under-valuation, at least in terms of this valuation metric. The Free Cash Flow chart also includes my forward projection. Even though the earnings projection through the end of the fiscal year is modest, the free cash flow projection remains robust.

Now let’s look at the CPE Valuation Range. AAPL has now dropped below the CPE level seen as the depths of the financial crisis. It is hard to imagine that is a valuation level that makes sense. Nevertheless, the earnings gap down needs to be respected as part of seeking out a new valuation base, even it is under-valuation during a period when Apple’s growth prospects are uncertain.

Lastly, let’s look at the long term quarterly range charts. There are three: CPE Range, PE Range, P/Cash Range. The CPE and PE range charts show well just abruptly AAPL has moved to record lows over the past few years and below the 2009 valuation levels. But the P/Cash Range chart is especially striking. The huge gap down is so severe because priced moved down dramatically while cash jumped up dramatically, all overnight. That made the Price/Cash ratio plummet to financial crisis levels, a valuation level AAPL hadn’t traded anywhere near since early 2009. I see this as another piece of evidence of what I consider the current under-valuation of AAPL shares.

Conclusions

The conviction in AAPL being the safest big cap investment in town is being questioned, rightly or wrongly. Which do I think it is? I think it is wrongly. I respect Tim Cook’s statement “Don’t bet against Apple.” I respect the recent CapEx spending trends, and think it preludes continued growth. Free Cash Flow remains strong and is growing, and that’s even when taking into account the CapEx spending that is part of the FCF equation. I understand the drop off in earnings growth. That’s a valid criticism on the surface. However I chalk that up to the tough comparison of the blowout earnings in the Dec and Apr earnings reports from a year ago. Apple is a victim of its phenomenal success from a year ago.

The big problem is that we have to wait another full quarter to get more information on the fundamental analysis picture, confirmation of the Free Cash Flow trend, and clarification on the earnings growth prospects.

Short term we are in wait and see mode to see where the short term swing low will occur, whether we get capitulation right now or later in the quarter, and where the roughly 110 point range for the quarter will be positioned relative to current price.

Bottom line: AAPL has undergone a sudden revaluation. I consider it to be a temporary under-valuation condition.

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).
Dec 012012
 

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

AAPL has firmly rejected the low valuation levels seen two weeks ago.  After falling to a CPE 11.4 intraday low, it closed above the CPE 11.8 level and has moved up strongly ever since.  CPE 11.8 was the valuation low from late 2011, and we never closed below that level.  That is a confirmation of that valuation level as a low for AAPL, and a rejection of such a low valuation.  Buyers are fully willing to step in and strongly buy AAPL when valuation gets that low.  The AAPL price action rejected all valuation levels below CPE 12, paused briefly near the CPE 12.6 level that was important back at the May low, and has pushed up to CPE 13.

Where are we now?

CPE 13.  That’s where we are now.  But that’s not meaningful unless we look at the Valuation Range Chart.  We can see that we are still below the mid-point of the valuation range over the past year, which has ranged from a low of CPE 11.4 to a high of CPE 16.2.  The mid-point is therefore CPE 13.8, which is presently near 620.  Last quarter was a high valuation quarter, and we traded largely in the upper half of the valuation range.  This quarter is a low valuation quarter.  I expect we will trade largely or entirely within the lower half of the valuation range.  Price has recovered nicely up to this point.  We have filled the gap at 580, and have traded within the range of Oct 26, the high volume day after the most recent earnings release.  I expect this area will provide some resistance.  Interestingly, we have also retraced almost exactly a Fibonacci .382 of the valuation range, which would mean a move to CPE 13.2.  AAPL is back to a reasonable, if not still somewhat low, valuation level.  But since this is a low valuation quarter, “somewhat low” valuation is quite a reasonable valuation to spend some time at.

What’s next?

(Update Note: This section turned out to be too bullish regarding the trading range into the end of the year.  Read the update sections below for how my analysis changed as new information was presented)

At some point between here and the end of the quarter (I measure quarters from earnings release to earnings release), AAPL will need to retest the lows.  It can do that with a brief plunge again that gets bought up, or it can do that with a narrow consolidation range.  Look at the trading in June of this year on the Daily CPE Chart to see an example of coming off a low and then trading in a range before moving higher.  This valuation range between the two red lines on that chart, CPE 12.6 to CPE 13.4, would be a very logical range to trade in through the end of the year.  We could push up to the 610 area first, then fall back into that range, or we could have already put in a short term high already.  Whatever happens, the overall theme of this being a low valuation quarter means that AAPL valuation should remain under pressure through the end of the quarter.  Under how much pressure?  Well, let’s take a look at some recent history…

AAPL End of Year Valuation Weakness

Most AAPL followers are used to seeing AAPL price rally end of the year and into January.  It is frequently making new highs amid strong holiday sales and expected strong earnings and earning growth to be reported in January.  With the exception of late 2008 during the financial crisis, that has been AAPL’s price pattern for years.  BUT, and this is a big but, that has NOT been what has happened to AAPL’s valuation at year end.  While AAPL’s price is usually strong at the end of the year, AAPL’s valuation has done just the opposite.  For every year the past 4 years AAPL’s CPE valuation level has dropped at the end of the year, and has closed the quarter near the CPE low.  Look at the CPE Range Chart to see this phenomenon.  Look at each December candle.  Those represent the CPE levels for the quarter from the earnings release in September until the earnings release in January.  Every one of them is a solid red candle, closing the quarter near or at the low of the quarter.  AAPL ends the quarter in January just before earnings at the lowest CPE valuation level of the quarter.  Now look at this current quarter so far.  We are now sitting in the upper part of the range for the quarter.  So will we go back down to the CPE low, back near CPE 12 or lower, between here and January 22?

This will be very interesting to watch.  Will price seasonality hold true, with AAPL rallying through December and in to January?  Or will the valuation seasonality trend hold true with AAPL moving to lower CPE valuation levels between here and January?  Or will it be something in between?  Maybe valuation remains under pressure as I’m expecting, but closes the quarter in the middle or somewhat below the valuation range mid-point for the quarter.  The quarter itself has ranged so far between CPE 11.4 and 13.9.  So the mid-point for the quarter would be at CPE 12.7.  On January 22 that valuation level will be near 600.

The reason we’re in this quandary between price seasonality and valuation seasonality is because Apple’s year-on-year earning growth this year will be far below the growth of the past 4 years.  The CPE lines had a steep upward slope during the holiday quarter the past 4 years, so even as price rallied, CPE valuation remained weak with price not able to keep pace with the steeply sloped CPE lines representing the strong earnings growth of the holiday quarter.  Well we don’t have that this year.  The CPE lines are rather shallow this year due to the much lower earnings growth.  Therefore if valuation weakness this year again asserts itself, it will also result in weak price action.

This bears watching.

Update:  Thu Dec 6 – AM

AAPL goes as planned.  We have our short term valuation swing high we were watching for.  I expect that valuation high will act as resistance the rest of the year, perhaps the rest of the quarter (until next earnings).  Our expected retest is under way now too, in stunning fashion.  Yesterday closed exactly at the CPE 12 level.  This valuation level right here should act as support, and needs to act as support.  I want to see any price action that happens below CPE 12 to be bought up aggressively just like last time.  We spent 2 days under CPE 12 last month.  I want to see it spend even less time under CPE 12 this time.  Refer to the CPE Daily Chart for a visual.

Update:  Weekend Dec 9

A moment of truth is right here and now.  AAPL price action is about to determine whether this valuation level down here near and under CPE 12 will be rejected or accepted short term (next few weeks).  We are confident this valuation level will be rejected intermediate term (next few months) as AAPL moves to its next valuation swing high in early 2013.  But right now we are focused on the shorter term through the end of the year and the end of the quarter.  For this shorter term period, things have gotten a lot more complicated due to Friday’s failure to follow through on Thursday’s reversal bar.

If Friday had rallied and followed through to the upside, I would have called for a probable move back to 580-610 area, followed by another spike down at the end of the year completing the bottoming pattern.  This scenario is still possible, but less likely due to Friday’s action.  Friday’s action means there is a higher likelihood that these lower valuation levels down here are being accepted short term.

In my Thursday AM update I said I wanted to see AAPL spend less time under CPE 12 than last month when AAPL spent 2 days under CPE 12.  Thursday spent only a single hour under CPE 12.  That was perfect, exactly what I wanted to see.  However Friday collapsed right back down under CPE 12 for most of the day.  So for AAPL to spend less time under CPE 12 than in November, AAPL needs to move back above 540 by Monday’s close.  If that does not happen, then that means valuation under CPE 12 is being accepted to a greater extent than in November.  That will be a short term negative.  If sub CPE 12 valuation levels are being accepted, then what?

Well, then it will mean this valuation weakness we have been expecting all along for this quarter will result in price action that is more complex, deeper, and pushing these lower valuation levels for more time this quarter than I had originally expected.  In other words, as weak as I had expected AAPL to be this quarter, we are on the verge of AAPL proving that it will be even weaker for more of the quarter.  Don’t take that to mean that we’re heading down into the mid or low 400s.  It just means AAPL would hang out here around CPE 12, or mid to high CPE 11 area, through the end of the year.

Here is a very important point to remember:  You will notice that the CPE Range Chart now reflects a red candle for the current quarter, just as I talked about at length higher in this post (read the section “AAPL End of Year Valuation Weakness” again to refresh your memory).  This price action we are getting now is consistent with the valuation seasonality analysis I presented.  So we really shouldn’t be surprised, should we?  As I said at the end of that section, this bears continued watching.

Update: Weekend Dec 16

We have our answer to the question posed in the last update.  These lower valuation levels are being accepted.  We have now spent much more time below CPE 12 than we did in November. This price action neutralizes the V bottom in November.  We are now back in the mode of looking for new confirmation of a valuation low, and the possibility of probing lower for a new valuation base.

What we have here is a compounding of two valuation factor and one technical factor.  The first valuation factor is the End of Year Valuation Weakness seasonality as explained in the section on that topic earlier in this post.  The second valuation factor is P/E compression due to decreased earnings growth.  The AAPL TTM Earnings Growth will be about 30% as of January earnings.  That is the lowest yearly growth in many years (since before the iPod era) and less than half the average growth of the past 2 years.  And lastly, the technical factor is the correcting of the explosive rally in early 2012.

AAPL is now in the mode of seeking out a new valuation base.  That basing formation may be created by an exhaustion, panic bottom like the one in November, or a weeks long rounded formation of value buying.  It is exceedingly difficult to determine which we will get.

Some levels to watch are the valuation low from the financial crisis at CPE 10.4, which is denoted by the blue line on the Valuation Range Chart.  Furthermore, if this down move is destined to take out 505 with continued power, there is a Fibonacci target at 471 that bears watching.

As a look ahead, keep in mind AAPL always trades in a large price and valuation range every quarter.  After we get a confirmed bottom this quarter, the valuation high next quarter should be approximately 3 CPE levels above where the low comes in.  The CPE Range Chart shows that the size of the valuation moves from quarter to quarter allow us to set our expectation for the next rally.   That is especially true for a quarter that follows a weak December quarter.  Use the CPE Weekly Chart to imagine what that would look like.  I will lay out the parameters of my own expectation in a future post.

Update:  Weekend Dec 23

Nothing of significance changed in the past week.  We are on watch for the valuation low to complete before the end of the quarter (measured from earnings release to earnings release).  We may be bumping along the bottom here to form the base for the next strong rally, or could have one final thrust below 500 to complete the bottoming process.  The Valuation Range Chart makes it clear we should expect an intermediate term bottom in AAPL near here in both time and price.

If we break 500, there is a Fibonacci target at 471 that could be reached in a V-shaped reversal.  Alternatively, this area near CPE 11.1 could be the valuation low that holds.  The very short term is unclear because volatility has subsided, and AAPL price is at an inflection point.  Watch 520.  Above that level and bulls are starting to take control, to be confirmed on a break above 534.  Below 520 and bears will remain in control, with the down trend on their side, confirmed with a break below 500.  But either way, AAPL is indeed in the process of trying to put in a bottom, what with down momentum having waned, and valuation where it is.

No matter what happens with the short term price swings, I expect AAPL to remain relatively weak through the end of the quarter.  Read the “End of Year Valuation Weakness” section above as to why.  Additionally, we should expect AAPL will be down or sideways during the final two weeks before earnings.  That has been the pattern in all of the past 4 quarters, and in 11 of the past 18 quarters.  So here’s some speculation:  If AAPL intends to have a thrust up out of this bottoming formation, the best chance of it would be during the first several days of the year.  If it did that, then it could have its 2 week consolidation or decline into earnings, creating a higher low. That would still satisfy the “weakness through the end of the quarter” expectation, and also still hold the CPE 11.1 valuation level.  Essentially, I’m just in wait and see mode for the next few weeks to see how this bottoming formation will take place.

Intermediate term timing:  The manner in which AAPL topped, with the strong rally to 705 and the strong decline off that level, sets up a predictive timing pattern whereby the price swings on the right will closely mimic the swings on the left that led up to that peak.  This is essentially why Head & Shoulders patterns work and look symmetrical.  The final rally to 705 was 8 weeks, and the first big wave down was also 8 weeks.  The 10 weeks of basing and rallying that came before all that will likely be matched by 10 weeks of basing and seeking a valuation base.  We are currently within that 10 weeks now, and it extends into mid January.  This is an additional reason why I am expecting relative weakness in AAPL through the end of the quarter and into earnings.  For a similar reason, what will follow THAT will likely be a strong rally lasting 5-6 weeks, ending with an expected peak at the very end of February or beginning of March.  At what price?  Well, perhaps only reaching 610, and possibly the 650+ area.  The 610 level comes from a P/E compression down trend channel since spring 2012.  And the 650 level comes from an expected CPE 3 height rally which has been very common with AAPL in recent years.  I will explain all of this in more detail in a future post once we get past the valuation basing we are watching for now.  But I wanted to give a brief look-ahead and the basics of my current thinking of both time cycles and price expectations.  And obviously, actual earnings results will impact those expectations.  The fall decline went deeper than previously expected because of the weak Oct earnings.  The January earnings results will impact the extent (but probably not the timing) of the rally to the next valuation high.

Nov 172012
 

One extreme begets another.  From one extreme to the other.  For every action, there’s an equal an opposite reaction.  Whatever you want to call it, that’s what we’re experiencing with AAPL this year.  The Valuation Range Chart now shows a rather large valuation range for this year.  From a P/E high of 18.3 in April to a P/E low of 11.5 this week, only seven months later.  By that measure we just had a 37% correction in AAPL valuation.  But that’s really not a fair metric.  I prefer my Continuous Valuation (CPE) metric.  But even when measuring using CPE, we just had a 30% valuation correction in only 2 months.  We went from a CPE peak not seen in over a year, to a CPE level not seen in over 3 years, not since early 2009 near the depths of the financial crisis.  See my new CPE Range Chart to see how CPE has changed over the past few years.  So why did we get these extremes this year?  Is there an explanation for this that makes sense?  Yes, there is.

The very strong rally in early 2012 was due to the strong 95% TTM earnings growth during FY12 Q1 and Q2.  With such steep CPE lines, price had to move up very rapidly to keep up with Apple’s valuation.  That rally created some huge momentum.  Because of the way crowd psychology works, that momentum snowballed and fed on itself, and AAPL moved to an unnaturally high valuation level.  Before that period, AAPL had been in a period of P/E compression as it grew in size to become the largest company in the world.  So for three quarters, AAPL deviated from that P/E compression and instead experienced P/E expansion, and CPE expansion too (my preferred valuation metric instead of P/E).

But that period is over.  Earnings growth is coming back to earth now.  The earnings comparison for the upcoming FY’13 Q1 and Q2 will be tough compared to 2012.  Trailing 12 month growth is already back down to 60%, and will very likely move even lower for the next two quarters.  And so here we are.  Valuation compression is reasserting itself.  And it’s doing it in dramatic fashion in one swift 8 week move. AAPL is probing to find a new valuation low level.  Did it find that lower valuation level this week?  I claim that yes, it did.  And we need to proceed assuming that the price low is in.  CPE dropped to a low of 11.4 this week.  That’s down firmly in the range of the valuation AAPL had at the depths of the financial crisis in 2009.  Could I be wrong assuming the price low is in?  Yes.  But if I’m wrong, I’m virtually certain I’m not wrong by much.  Downward momentum on the latest thrust lower is lower than the down thrust before it.  Price moved down less this time, and had a more powerful move off the lows in less time than before, on even higher volume.  The evidence is convincing, and the probability is rather high.

AAPL did drop to a lower CPE level this quarter than I expected, however.  It is likely another story of extreme momentum and sentiment making AAPL go farther that it otherwise would have.  I didn’t even expect AAPL would hit the CPE 11.8 level from last 2011, let alone drop below it.  But let’s look briefly at what happened this week.  We dropped below the CPE 11.8 level intraday, but closed back above it.  That means, for one day at least so far, a valuation below 11.8 has been rejected.  I’ve left the CPE 11.8 level line on the Valuation Range Chart.  So far we haven’t closed below that level, we only dropped below it intraday.  As long as we get follow though on Monday, and don’t close back below CPE 11.8, that level can remain an important valuation level to track as we move forward.  Nevertheless, AAPL did trade down to CPE 11.4 intraday, so there has been at least some acceptance of that level that hasn’t been seen before.

Back to the longer term valuation trends.  The 3 quarter valuation expansion generated valuation levels that AAPL is unlikely to see again.  In other words, I do not expect to see CPE 16.2 reached in 2013.  The next valuation swing high, which is expected during the first part of 2013, will likely fall short of the CPE 16.2 line drawn on the Valuation Range Chart.  How far short?  I don’t have an opinion on that.  Not yet.  We need more information.  I want to see how much pressure AAPL valuation remains under for the rest of 2012 and the rest of the earnings quarter (until the next earnings release in January).  Once we see that, we can make a determination about what to expect for the next sustained rally to the next valuation swing high.

Nov 102012
 

This post will lay out what I expect for the recovery from the lows.  I want to be clear up front, however, that as of this weekend nothing is proven yet.  AAPL found footing on Friday and had an up day.  But it wasn’t a large up day.  It didn’t recover the losses of the previous single day.  And none of the down trend lines on the daily chart have been broken yet.  So the trend is still down.  Nevertheless, I am going to proceed under the assumption that the low is in, and start talking about expectations for the recovery and expected price levels and trading ranges for the rest of November and December.

This year has been a story of extremes.  The spring high at 644 saw the highest P/E level in over a year and the highest Price/Cash level in over a year.  With Friday’s low, we saw the lowest P/E level in over 3 years, and the lowest Price/Cash level in over 3 years.  We went from one extreme to another extreme with a large three wave (down, up, down) price pattern that dominated the middle of 2012.  It is in part because we went from one valuation extreme to another that this three wave pattern can be considered a now complete sideways retracement (correction, if you will).  AAPL can now continue its bull market.  That’s the good news.

Now here’s the bad news.  The 7 week decline that we are assuming is now over does not mean we start going straight up again.  It will be quite the opposite.  The next bull move will take a long time to get started in earnest.  We are likely to spend the rest of the year at low valuations.  By low valuations I mean in the lower part of the valuation range.  When I speak of the valuation range, you should always be referring to my Valuation Range Chart.  That chart will always show our roadmap for the coming months.  It has been updated this weekend showing the new P/E and P/Cash 1-year lows reached on Friday.  All the lower blue and pink horizontal lines have been redrawn to represent those new levels.

Lessons Learned:  So what did we learn from where this low occurred?  Well, (1) we learned that I was wrong about CPE 12.6 holding.  As bearish as I was about how low this decline would go, I wasn’t bearish enough.  We actually went down to CPE 12.0.  I was off by one day.  But that one day represented a fairly significant 0.6 CPE level of panic selling.  (2) We learned that the 200 day moving average meant nothing, as I tweeted at the time we hit it.  It meant nothing because the 200 day MA was at an unnaturally high level due to the extreme price movement in the spring of 2012.  It was higher than it otherwise deserved to be from a valuation perspective.  It was at a much higher valuation level than the last time we touched the 200 day MA in 2011.  Therefore that level could be ignored from the perspective of where we expected the low of this move to be.  But perhaps most importantly, (3) we learned that the CPE rocks!  The 1-year CPE low was 11.8.  We bottomed at CPE 12.0.  All the price highs of the past year are near the same CPE 16.0 level.  And both of the significant lows of the past year are close to the same CPE 12.0 level.  That can’t be said of the P/E ratio or the Price/Cash ratio.  The concept of Continuous Valuation continues to prove itself valuable.

What to expect next:  OK, back to the future.  How high will we bounce?  Not as high as many hope we will.  This decline has been 7 straight down weeks.  For anyone looking for a good bounce to exit longs, they have been left actionless.  For anyone trying to buy on extreme oversold indicators, they have been continually disappointed.  This kind of action takes a long time to repair itself.  There will be a lot of people looking to exit positions, get some of their money back, get whole, or as close to whole as possible.  AAPL rallies will be hit hard by sellers, like a game of whack-a-mole.

Here are some metrics of what we can expect.  Refer to my CPE Daily Chart to see the following levels.  We should expect to go up a Fibonacci 0.382 of the decline.  That would mean 599.  We should expect to go up by a valuation of CPE 1.3.  That’s the extent of the bounce off the May low.  That would mean heading to CPE 13.4, which is at 596 a week from now.  It’s not a coincidence that those two calculations agree with each other.  So that should be the level that is most likely.  It’s most likely that we reach the 590-605 area, and it’s most likely that we stop there as resistance.  Somewhere in that general area should be what is expected.  Can AAPL go higher?  Sure.  Is it likely?  I don’t think so.  At least not for the next few weeks.  AAPL will trade in a valuation trading range in the lower part of the overall valuation range.  Remember, we expect this to be a low valuation quarter.  The move back to higher valuations in the valuation range will not begin in earnest until January.  Until then we will likely consolidate with low valuations largely within the CPE 12.6 to 13.4 range for the rest of the year.  That’s my expectation.  That may be fine tuned once we see how quick the move off the lows is, and where the swing lows occur following the next swing high.

Caveat:  There’s still the big caveat that I mentioned at the very top of this post.  Price action has not proven yet that the bottom is in.  All this discussion so far is based on my assumption that the bottom is in.  We want to see Friday’s high get taken out.  That will be the first good sign.  We want to see a move above 575 that holds, above the start of the final 2 days of panic selling.  Once that happens, the odds tilt strongly in favor of the low being in.  By 575 the rally will have moved significantly farther than any of the bounces seen on the way down.  And some of the down trend lines will have started to break.  So that’s what we want to watch for early this next week.  If we head back to 533 on Monday and trace out another 3 wave consolidation near the lows, then the odds favor that the decline is not over and we are heading still lower.  I consider that scenario unlikely.

Nov 13 Update:  V-Bounce Not Likely

As I tweeted this morning, I think an expectation for a V-Recovery or V-Bounce needs to be taken off the table as not probable. With no rally after such extreme oversold indicators, some other outcome is likely to occur.  But what?  Well, that’s hard to predict.  A rounded bottom would be my favored scenario, somewhere in this area around CPE 12.0.  I just can’t get on board with a scenario that involves any significant amount of down from here short term or any significant amount of up short term.  The valuation levels just don’t support big down as having much likelihood.  And big up is not likely in my opinion due to reasons outlined in this original post.  Even if we get a big up day here soon, I would expect it to be followed by a whack-a-mole response.

Nov 15 AM Update:  Inflection Point

AAPL is at an inflection point.  We have consolidation near the lows.  Momentum has waned.  And we have outperformance relative to the SPX.  These are signs that value buyers are participating to support the price.  I can easily see a scenario play out where the closing low is in, and AAPL has its first decent rally/bounce right from here, immediately.  Or we may have one more thrust to the downside.  If we do get that push lower, that is very likely to be the last of this decline, and will mark the low of this record breaking decline.

What happens next and for the rest of the year is very difficult to predict, or even have much of an opinion on.  That’s because we have no price swing structure on which to base expectations.  We need more information.  We need the first solid rally off the lows to end and the subsequent pullback to take place in order to get a clearer picture of just how much buying interest there is waiting on the sidelines.  It’s very hard to know.  I’ve laid out some general expectations in the original post above.  But that’s just a guess at best based on averages and typical technical responses to previous price movements.  We will just have to wait and see.

What we can be confident in, however, is what the Valuation Range Chart tells us.  And that is that we are at the bottom of the historical valuation range of the past few years.  That means the downside from here over the intermediate term is limited, and the upside from here over the intermediate term is much larger.  We now just need the short term to resolve itself to reconfirm this CPE 12.0 area as a valuation low.

Nov 16 Intraday Update:  Extremes

Well AAPL certainly likes to do things to an extreme, doesn’t it?  That’s one thing we can count on.  So many aspects of this decline hit a new extreme.  I’ll do a writeup this weekend on this topic, as well as where we stand with valuation ranges.  This new valuation low will help us with setting 2013 valuation expectations.  I’ll explain why in a new post soon.

Nov 032012
 

The valuation low we are looking for is imminent.  If you haven’t read my Post-Earnings Analysis where I laid out the parameters for where to expected this low to occur, go read it now.  It contains the evidence of why CPE 13.4 was probably not going to hold, and why a low should be expected in the area of CPE 12.6 to CPE 13.0.  Well, we are now here.  We are exactly at CPE 13.0 as of the end of the day Friday.  These levels can best be seen visually on the Daily CPE Chart.

Ideally, this coming week we will continue down to the CPE 12.6 area, and reverse hard.  I can imagine there are a lot of stops just below last quarter’s low at 570.  Taking out that level, triggering a bunch of stops, and then reversing hard, would be the most ideal scenario.  But really, a bottom anywhere in this area would be fine.

So what’s next?  What can we expect after we put in this imminent bottom?  You’re probably thinking, “We go back to the valuation range high!”, right?  You might think we’re going to head straight back to 700.  Well, not so fast.  And I mean that literally.  While we will indeed eventually go back to the valuation range high, it won’t be anytime soon.  It won’t be this year, and it won’t be this quarter (before next earnings announcement).  That will have to wait until next quarter.  How do I know that?  Because AAPL has never traveled from the valuation range low to the valuation range high in the same quarter.  Look for yourself at the past two years on the Valuation Range Chart.  The valuation range low in Nov 2011 didn’t result in a move to the valuation range high until March 2012, well into the next quarter.  The valuation range low in May 2012 didn’t result in a move to the valuation range high until September 2012, again well into the next quarter.  I’ve gone back several years.  Never, after trading near the 1-year valuation range low has AAPL rallied to the valuation range high in the same quarter.

You might say to me, “But after Nov 2012, AAPL did make new highs in early Jan.”  And I would reply reminding you that you should be looking at the valuation range channel, not price alone.  It’s the valuation range that matters!  AAPL only quickly moves to a previous price high quickly during a quarter where earnings growth is strong and the slope of the CPE lines are steep.  In such a quarter, price does need to continue rising quickly just to keep up with CPE valuation.  And while it’s rising quickly in price, it is making little headway within the valuation range channel.  The rally off the Nov 2011 low was such a situation.  Go look at that again on the Valuation Range Chart.  And then notice that we don’t have those conditions this year.

OK, now that we’ve dispelled with the expectation of returning to 700 quickly, what can we expect?  In short, we can expect AAPL to trade the rest of the year in the lower portion of the valuation range.  In other words, expect this whole quarter to be a low valuation quarter.  Look at the Daily CPE Chart, and review what happened after the May low, as an example.  AAPL rallied quickly off the CPE 12.6 level, but ran into strong resistance at CPE 14.0.  It spent several weeks bumping up against that valuation resistance level before finally pushing through, up to CPE 14.6.  That’s roughly what I expect to happen again this time.

After we see where the bottom occurs, we can talk more about what CPE levels may define the trading range for the rest of the year.  As an initial rough estimate, the expectation should be for price to largely remain within the CPE 13.4 to 14.0 area for most or all of the rest of the year, with peaks no higher than the CPE 14.6 area.  We can fine tune that expectation after we see where the bottom occurs and how the first rally off that bottom looks.  I’ll also provide more evidence as to why we should expect valuation levels to remain under pressure the rest of the year.  While it is true that almost anything is possible, and anything can indeed happen, we are most interested in what is most probable.  What we expect should be what is most probable.

Update 11/7: Nothing has Changed

The scenario laid out above is continuing as described.  Today we closed almost exactly at CPE 12.6.  This is the valuation level area that makes the most sense to put in a low.  Read the 2nd paragraph above that starts with “Ideally….”  So far so good.  Now let’s see if we can reverse hard from this valuation level.  Everything would be so much tidier on the AAPL chart if the scenario continues as expected.  If instead the May low gets taken out, everything gets a lot more complicated, technically.  We want to see AAPL hold valuation levels that make sense.  That makes what comes next this quarter easier to follow, and the expectations for the move to the valuation range high next year easier as well.

Update 11/8:  The Crash Scenario

Things have changed after today.  AAPL has made a new 3 year P/E low, a new 6-month CPE low, and matched the 1-year Price/Cash low.  And there is evidence of panic and forced selling.  Under such conditions, valuation range levels have to be set aside for the very short term (hours and days).  At least partially (more on that below).  That’s because what is taking over with the price action are things like emotion, crowd psychology, and technical analysis.

There is a rumor that hedge funds are in a mode of forced selling of AAPL due to having too much leverage in their “safe” AAPL investment.  That means this would be like the financial crisis forced selling due to over leveraged positions, except this time it’s just in AAPL.  This narrative makes sense to me.  And it is consistent with the price action.  AAPL is now down 7 consecutive weeks.  AAPL has only done that 3 times in its history:  1993, 1996, 2000.  So this price action is truly extraordinary.  It doesn’t really matter whether the rumor is true or not.  The price action is not based on sane trading activity.

Historical valuation levels can still be useful in this environment.  But we need to go back farther than 1 year to find valuation levels to use here.  During the financial crisis in 2008 and 2009, AAPL crashed to bargain basement valuation levels.  You can see the P/E levels from that time period on the P/E Range Chart.  I have a CPE Range Chart similar to that which is not on my site.  That shows me that the CPE low from November 2008 was 11.4, and the CPE low from January 2009 was 10.4.  Those were truly bargain basement valuation levels.  If AAPL continues in its forced liquidation crash, those valuation levels may prove useful as a comparison to where we may be headed.  Those levels have been added to the Valuation Range Chart for reference.  I’m not saying we’re heading for CPE 10.4.  I include those levels so we can see where current valuation is relative to past panic extremes.

Good luck everyone.  If the May low gets taken out, this is going to get interesting.

Update 11/9:  Crash Scenario Update

This is a quick update to the above.  I think the crash scenario is likely off the table.  You never want to bet on a crash.  But I felt that after Thursday, I should at least lay out those lower valuations on the chart so we had context of the risk if Friday had continued with the accelerating selling.  It is a very good thing that the May lows did not get taken out.  It will be far easier to navigate the rest of the year and early next year with the low that we currently have in place.  Nothing is proven yet.  Read my next post for more info on that.  This post will end here.

Oct 262012
 

Apple earnings was less than expected. The charts have been updated to reflect the new valuation levels. You’ll notice the CPE levels have come down for the quarter just passed because of the new reality.

New valuation levels means new expectations for the  fall valuation low.  It is clear from the Valuation Range Chart that AAPL is trading in the lower portion of its one-year valuation range.  The Quarterly P/E Range Chart also shows the same conclusion.  Even though AAPL is at a low valuation, it has not yet dropped to the one-year valuation lows.

Let’s look at where the six-month, one-year, and two-year valuation lows have been, and where those valuation levels are now as a guide.  These can all be seen on the CPE Two-Year Chart, specifically:

  • CPE 13.4:  Represents the July low.  Earnings expectations are now lower than they were then, so I fully expect we will visit that level.  (Update 10/29:  The day after earnings we did indeed visit that level and bounced hard into the close.  The CPE 13.4 level is providing our first evidence of buying interest at that valuation.  A short term rally could develop from this level.  I expect this valuation level to eventually fail, and a lower valuation level to be seen before year end).
  • CPE 13.0:  Represents important bottoms from 2011.  This valuation level may hold.  It should be watched as a general area where buyers may come in to buy AAPL in large numbers.  AAPL may put in a bottom at this valuation level.
  • CPE 12.6:  Represents the level of the May 2012 low.  This is the most important bottom in 2012 so far.  It would be reasonable to expect AAPL to put in a low at a similar valuation level as the May low.
  • CPE 11.8:  Represents the lowest CPE level of the past year, from late 2011.  I do not expect this level to be seen this year.  Here’s why.  The late 2011 valuation level only became that low a valuation after the January earnings results were announced.  They were a blowout, higher than anyone expected.  It caused the CPE line connecting the Oct and Jan earnings announcement to be increased at a larger slope than when price was trading during the quarter.  Therefore investors and traders in December did not realize at the time that price had declined to a new record low of CPE 11.8.  That was only evident in retrospect.  Therefore I consider the CPE 11.8 a valuation level a “We’re not going there” line on my charts.

It is important to notice that the CPE valuation lines are increasing.  AAPL can make a lower valuation low and yet not make a lower price low.  It’s possible, especially if the valuation low is made later in the quarter.  So keep that in mind.  We’re analyzing valuation here.  Valuation changes over time, increasing every day according to our principle of Continuous Valuation.

Again, probably the most important two charts to track these levels going forward is my Valuation Range Chart and the Daily CPE Chart.  They show all the levels mentioned above and where price currently is within the range.