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.

  6 Responses to “The AAPL Nov 2012 Low”

  1. What you’re saying basically flies in the face of Zaky’s prognostications. Thanks for posting.

  2. I find your analysis compelling, but cannot help but think that your Continuous P/E chart fails to support your case. Looking back one year, Apple went into the same Q1 swoon, then proceeded to trade in a 12-13 P/E range until earnings, a case which offers little hope of seeing a CPE of 14.6 this quarter. The problem lies, I think and I hope, in your chart and not your analysis. Unless I am mistaken, you re-chart every quarter based on actual earnings, making the current quarter ex-ante and all others ex-post. This will not matter much for those quarters meeting expectations, but huge blowouts (such as Q1 2012) give the false impression that the market was keeping within a range that it would not itself have recognized at the time. If you could peer into next quarter’s results and see that Apple would miss expectations by 50%, or that they would exceed expectations by 100%, your reconfigured chart would change radically. In the first case, today’s market would actually appear giddy with optimism while we know that the opposite mood reigns. The market last year did not, for example, knowingly support a CPE of 12 in a bout of pessimism–the mood was fast turning optimistic but the market still found itself blindsided by a blowout.

    I suggest keeping a parallel CPE chart, basing each quarter solely on consensus quarterly estimates given at the time. That would show how sentiment evolves, with greater and lesser shocks arriving with each earnings release. I’d also be interested in seeing the same chart, but based solely on Apple’s own guidance. Were you to do this, I think these new charts would suport the case you make above, as well as show how the market values and trades the company it thinks it knows. Combining the new chart with the old would show to what extent Apple’s valuation has corresponded to reality. I would find that fascinating and would be willing to help. Let me know.

    • Kit you make a valid point, and it is one I have considered. 2011 Oct-Jan is a good example where the CPE lines during the quarter were in a different place than where they ended up after Jan earnings. I still have my original chart from then, with the originally drawn CPE lines. On the original chart, the Nov-Jan rally traded in the range from CPE 12.2 to 13.3. So even during the quarter, price traded in a lower valuation CPE range with the expectations at the time. This was a rather extreme example of this phenomenon you point out due to the unexpected blowout earnings. Statistically, earnings do vary, and my CPE lines will always be adjusted somewhat once actual earnings are announced. But I have to start somewhere, and my statistical earnings projection represents what is most likely, and I believe using what is “most likely” serves the valuation trading range model the best. For most quarters the CPE lines will not be adjusted much. Occasionally they will.

  3. Could you extend the valuation range chart to 2009 or 2010? If the CPE chanel was not steep between 2010 and 2011, it seems to me that the steep chanel between Oct 2011 and Jan 2012 was not known or certain by the traders at the time of trading until the earning was reported in Jan 2012.

  4. Apple Beat – I like to see new theories and models that help to understand and predict Apple’s price trends. Using a continuous trailing earnings (based on some future guidance) is an interesting concept. Thanks for sharing. I could not find a way to contact you separately, but wanted to add a link to your site on my Links page and on my forum — let me know if that is okay to do. Thanks again for adding some new ideas to the Apple investing community.