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.

Oct 132012
 

AAPL is in correction territory, down over 10% from the highs just 3 short weeks ago.  Here at AAPL Beat we evaluate AAPL valuation based on our own concept of Continuous P/E (CPE).  Please refer to the AAPL Valuation Page if you’re not familiar with CPE.  So where might we expect AAPL to bottom?  Where will value investors come in to buy?  At what price will enough buyers come in and say, “OK, this price is a deal.  I want AAPL at this price” and cause AAPL to bottom?  Well, as it turns out, recently AAPL has put in a bottom near similar CPE valuation levels.

The Jun 2011 bottom at 310.50 was at CPE 13.0.
The Oct 2011 bottom at 354.24 was at CPE 13.0.
The Nov 2011 bottom at  363.32 was at CPE 12.0.
The May 2012 bottom at 522.18 was at CPE 12.6.
The Jul 2012 bottom at 570.00 was at CPE 13.4.

Refer to the CPE Chart to see these levels visually on a two year chart.  So bottoms have been in the range of CPE 12.0 to 13.4, with the most two bottoms in 2012 at CPE 12.6 in May and CPE 13.4 in July.  If AAPL puts in a bottom near the same valuation level as one of the previous bottoms, where would that be?  Well, CPE levels change every day, ever increasing because earnings are rising every day according to our concept of continuous valuation.  So the best way to see where these levels are now and during the fall is on a price chart:

Refer to the Daily CPE Chart for a closeup view of recent months and the next couple months.  The CPE 12.6 and 13.4 levels are drawn with a light red line.  That is the general area where a low can be expected during the fall months.

Sep 152012
 

The measure of the probability of an earnings beat this October by Apple has taken a small dive, dropping from 97% to 95%.  That may not sound like much, but it actually nearly doubles the probability of a miss.  Why has this happened?  It’s due to the recent announcement this week of the new iPhone.  That caused many analysts to raise their earnings estimates, by a relatively hefty 5% on average.  If over the next couple weeks there is positive news of pre-orders and a strong iPhone launch, watch for additional upward revisions of analyst earnings estimates.

Jul 242012
 

Well THAT wasn’t expected.  Apple today reported earnings far below estimates, and also far below what the statistical model said was probable.  Make no mistake.  This wasn’t a miss related to inconsistent analyst estimates, such as we had October 2011, due to overly optimistic analysis by analysts.  That’s what the model is intended to detect and report.  No, this quarter was not such a miss.  This was a miss entirely attributable to Apple itself.  And it was a miss that was outside anything typical of Apple over the past 8 years.

I use data going back 8 years as part of the statistical analysis, and there has been nothing like this earnings report in all that time, not even during the financial crisis.  This was outside the normal expectation on earnings by such an extent that it made the standard deviation calculation jump up for use going forward.  Additional data is always good, as it will allow the model to be more accurate.

The model can’t protect against the result of a true miss like this one.  What it will do, however, is continue to output a true and accurate probability based on past data.  I suspect many analysts will over compensate once again, and curl up into a conservative, pessimistic fetal position, spewing gloom and doom, “this is the end of Apple”, rhetoric.  OK, maybe not to that extreme.  But I’m sure you understand my point.  Get ready for it.  It’s coming.  Rest assured, however, that the Earnings Beat model will be immune to all that, and continue the pure math of what the statistics actually support for the probabilities going forward.

I will update the Earnings Beat chart shortly.