May 012014
 

Last week’s earnings report was a beat, and confirms the earnings growth picture. AAPL should trade at valuations that assumes stable and growing earnings again, like the trading environment we had just prior to the 2012 large rise and fall.

One of the charts I that is the most important is my Free Cash Flow chart. For several months AAPL has traded in the range of 10x to 12x free cash flow. See what that means for this coming quarter at the link above.

During 2010-2011 AAPL traded mostly in the range of 11x to 13x FCF, dipping to near 10x at the end of 2011. The late 2012 collapse sent prices under 10x for two whole quarters. We’re now back to a more reasonable 10x-12x range now that earnings has stabilized and begun growing again.

The other important valuation chart is the CPE Valuation Range. My next post will address that.

Sep 222013
 

A few months ago I wrote that I expected AAPL to complete its bottoming pattern and breakout from its low valuation and begin trading in a higher valuation range as part of its recovery from negative earnings growth.  I expected that valuation breakout at the end of the last quarter.  Instead we got it this quarter.  However price has recently collapsed back down to the breakout valuation level.  I have changed my view regarding the bottoming process.  I think price has more work to do to complete the valuation bottoming, and there will be price swing overlap.  I have come to that conclusion after developing and publishing my new Valuation Model (see my previous post for the introduction to it).

Let’s consider where earnings and earnings growth are at this time.  After next month’s earnings release AAPL’s TTM earnings will be in the low to mid 39 range.  That will be roughly 11% below the TTM earnings from a year prior, and in line with the earnings from almost two years ago.  As of January 2012 TTM earnings was 35.11 and as of April 2012 it was 41.01, amid earnings growth of 95%.  AAPL went into those two earnings releases at a price of 420 and 560, respectively.  Now we will be in the middle of those earnings values at 39 and change.  The middle of the price range from early 2012 would be 490.  Do we really believe AAPL belongs at 490 now, with -11% TTM growth, when back then it had 95% TTM growth?

On the plus side, this next earnings release should be the nadir of the TTM earnings decline.  Earnings growth will be on the rise again after this and through 2014.  The new Valuation Model takes that into account, and is worth watching.  I’m not putting a ton of confidence in the valuation model yet.  I’m watching it and evaluating its usefulness.  It does hint, however, that we shouldn’t expect AAPL to continue a strong rise in price just yet, and should instead expect backing and filling, testing the lows, producing higher lows as part of a continued valuation basing pattern with typical CPE Trading Ranges.

Sep 212013
 

I’m making public the beta version of my AAPL Valuation Model.  It is my attempt at creating an expected trading range for AAPL based on a valuation model that takes into account many of the well established concepts on my site:  Continuous P/E (CPE), CPE ranges, growth, a PEG type valuation ratio, and the recent change in earnings growth as a type of earnings range accelerator factor.  Click for the full page with chart and explanation:

AAPL Valuation Model

 

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.

Feb 102013
 

AAPL has begun a rally that should last a few weeks. Let’s look at the evidence. The 2nd and 3rd day after earnings created a 2 day reversal formation. The following week we had another 2 day reversal pattern that formed a successful retest of the first bottom. Price has since broken out above 465 resistance on good volume. AAPL has also closed above the 5 day EMA for 4 days in a row. The last time it did that was during the November rally. This rally can therefore be considered the sister rally to the November rally. Let’s look at how far we may expect this current rally to run. There are several ways to come up with an expectation. The Nov rally was 89 points, so that would mean a target of 524 this time. A Fibonacci 0.50 to 0.618 retracement of the 594 to 435 decline would mean a target of 515 to 533. A Fibonacci .382 of the entire 705 to 435 decline would mean a 538 target. And lastly, there is the chart shown below. I drew the lower trend line connecting the two most significant lows of the past year, and then a parallel line from the Spring 2012 peak at 644. During the week ending March 1 the upper line is at 533. I’ve talked a lot about the AAPL symmetrical time cycle pattern and the expected next significant peak during the week ending March 1. This is a chart representing that analysis. Notice the tops and bottoms that have occurred equidistant from a symmetry line the week AAPL topped at 705.

AAPLsym-130208

So we have price targets in a range from 515 to 538. From the oft mentioned time cycle analysis I have mentioned over the last few posts, that target is expected during the week ending March 1, as represented in the above chart.

Following the next peak, whenever and wherever it actually occurs, I will be expecting a 3rd push lower, contained within the downward sloping red trend channel. The 1st push down was from the all time highs at 705 to the Nov low at 505. The 2nd push down took us to 435 after earnings. The 3rd push down will occur during the Spring, March into April. It will either be a retest of the 435 lows forming a higher low, or make a lower low with bullish divergence. That will complete the full year of AAPL weakness that began in April 2012. We will have had a full year of AAPL correcting the gains from the huge rally at the beginning of 2012. The year long correction was rooted in fundamentals: the large drop in earnings growth, as can be seen in the AAPL Earnings Growth Chart. Another way to look at the fundamental underpinnings of the year long correction can be easily seen in my new chart showing AAPL Continuous Free Cash Flow. That last chart is especially interesting as it shows the one quarter pause in slope of the Free Cash Flow (FCF) lines in 2011, and the resulting price action. And we now have four full quarters of pause in the slope of the FCF lines. The chart includes my projections for the next 3 quarters. The July and October earnings releases have a far easier comparison to 2012, which is why the FCF lines will likely resume a steeper upward slope. My FY2013 earnings estimate is only 12% higher than FY2012. And yet with even that slower earnings growth, the FCF lines still resume a rather steep slope. I will be undertaking some further analysis to fine tune my projections. And the April earnings release will add a lot of additional information as well. Even if I am somewhat optimistic with my estimates for Jul and Oct, the slope will still resume upward, exactly because of the easy comparisons to Jul and Oct 2012 mentioned earlier.

This phenomenon of quarter comparisons of 2013 to 2012 is why the 3 push down price pattern will mark the end of the year long correction in AAPL from April 2012 to April 2013. Following the low expected in the Spring of 2013, I will be expecting AAPL to end the current under-valuation and embark on a long and steady rally to more reasonable valuations both in terms of CPE and CP-FCF. Look at the AAPL CP-FCF Chart again and imagine AAPL heading towards a FCF multiple of 12 or 13 in the latter part of 2013. Even if my lines need to be drawn slightly lower, that will still represent an impressive upward revaluation rally.

I am hopeful that soon AAPL will begin to move more in line with the general market. It is always easier to analyze the AAPL technicals when it is topping and bottoming at about the same time as the general market. If the Dow and S&P can continue its grind higher into the week ending March 1, the expected AAPL price movements will be easier to confirm as they happen.

This entire roadmap expectation for 2013 is what I will be monitoring, fine-tuning, and likely modifying in future posts as I watch this unfold.

Update: Mon Feb 18

The early peak this week at 485 has tempered the upside targets and proven they are too optimistic. I posted this in the Forum after Tuesday’s trading along with the explanation and the chart shown below, which now includes the rest of the week’s trading. The blue up sloping channel is what I think will prove to be a bear flag. The end of week decline has also now overlapped the price range of the day after earnings and fallen back below the 433-465 breakout zone, evidence that this rally off the lows is, as expected, NOT part of a new AAPL bull market.

I continue to believe an important high will come during the week ending Mar 1 (denoted by the vertical blue lines). I expect that high will be within the bear flag channel. Since price has come all the way down to the proposed lower blue trend line (now only a few points below Friday’s close), we should expect that AAPL may not even make it back up to the upper trend line for its peak. This last rally attempt is the most uncertain, as this AAPL upward swing cycle is nearing its end. The pink moving average in the chart is the 45 day EMA, which as you can see has exactly marked the peaks of each significant swing high of the past 4 months. I will be watching that moving average as well as we approach this high we’re looking for.

The rest of the analysis in the original post above still stands. After this upcoming peak, I expect AAPL will begin a multi-week decline and put in a low just below the 435 low. If this whole multi-week rally can’t even make it above some key moving averages (like the 45 day EMA), then we can be reasonably certain new lows are ahead. How far below 435 is hard to predict. That’s because capitulation can take on many forms, and how the general market is behaving (which is due for a correction at some point soon, too) will play a part in how AAPL’s price behaves. There’s also still that previously posted analysis that says that the range for the quarter should be near 110 points, or even more.

AAPLflag-130218

Update: Wed Feb 20

The bear flag scenario has been invalidated. With no short term expectation, I am watching two larger timeframe expectations that have already been covered in previous posts: (1) The range for the quarter should be 2.1 CPE high at a minimum, and 2.5 CPE expected. That would translate to 93 points, and 110 points respectively. (2) The earnings gap down was a revaluation, not capitulation. Capitulation is yet to come.

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.