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.

  10 Responses to “The AAPL Nov 2012 Recovery”

  1. Hi,

    Very nice, thanks for this analysis!

    Do you have statistics or graphs showing how your CPE estimates changed in the past and also, how the “E” from the CPE estimates tracked the actual “E” when it was announced?

    Thanks again,

    –joseph

    • The CPE lines for the current quarter and into the future are my own estimates, based on the statistical earnings model also featured on my site. Since it’s a straight statistical prediction, some quarters’ actual earnings will come in better, and some worse. Based on the standard deviation, it usually doesn’t change the CPE lines much, by a tenth or two of a CPE level. Occasionally it’s a bit more. Jan 2011 was one such example. Earnings were such a blowout, CPE moved up 0.4 higher than were I had it drawn. But even so, that didn’t change the price movement expectation much during the quarter. The CPE lines were still steep, giving added confidence of a rally through December and into Jan along the CPE line — that is, once the November bottom was confirmed and retested.

      Note that this year we do NOT have the same situation. The CPE line is quite shallow, because trailing earnings growth expectations are not nearly as high. So for this year, we do not have the support of a steeply rising CPE line to give us confidence of strong rally going into January.

  2. This is quite possibly one of the most competent and authoritative assessments I’ve see on AAPL in months. Very impressive body of work at this site.

    I was also pleasantly surprised to find EW language. I worry about your comment at the end, that the low may not yet be in. But I also worry that the entire rally from the $78 low to the $705 top is a completed, gigantic 5 waves, and the recent sell off has broken the 2-4 trend line on that scale.

    That would suggest the upside is over in AAPL for now, and the sell off may not be over until at least a Fib retrace of the whole rally from $78.20 (or $82.33) to $705.07. Even a 0.236 retrace would suggest a price of $425 (on a log scale). Or to $467, which is a .382 retrace on a linear scale.

    Any thoughts?

    Kind regards,
    Roy

    • Thank you for your generous endorsement of the value of my work.

      I have indeed studied EW. I think it has come credibility in explaining the human emotion aspect of price moves over the short and intermediate term. For the long term there is a big caveat. And that is that when you are dealing with an instrument such as an individual equity, the valuation fundamentals of the company take precedence. A price level of $425 does not make sense as an accepted value for AAPL at this point. The cash levels, cash flow, earnings ability of the company prohibit such a valuation. The ONLY situation under which such a price would be seen, in my opinion, would be an overall market crash, and even then the price would be seen only briefly. That price level would be rejected quickly as shares at that price would be bought up aggressively. Look at what happened at a stock price of $506 today, for example. $25 points of buying in less than an hour resulted.

      Where you could use EW type analysis over the longer term is if you adjusted for valuation. In other words, if you applied EW analysis to the P/E chart itself. Try it and let me know what conclusions you come to.

  3. Hi Dave,
    Lot of confused day traders I follow on the twitter stream today. Have no idea why AAPL did not collapse. Hopefully your CPE theory holds up and AAPL bottoms out around here. Not sure what happens tomorrow but someone sure supported the stock at this level today during the market plunge.
    Best Regards,
    Darrin

    • Wondering based on how accurate the cpe has been what the ranges are going forward in April July oct13 jan14…with huge price swings like this possible in 69 days

      • CPE and the valuation ranges give us context. When AAPL makes a new 1-year record high or low in valuation, we can then analyze why we think that happened. For example, I think the CPE 16 level we saw twice in 2012 was the result of the momentum we saw in the super rally at the start of the year. I therefore do not expect we will reach the CPE 16 level in 2013. We will fall somewhat short of that valuation level at the next valuation swing high that due early in 2013. That is given added credibility by the fact that we just made a new CPE valuation low, lower than anything in the past 3 years. I will be writing this up in a few weeks when I talk about the parameters for when and where the next valuation swing high can be expected.