Apple’s Mini-Crash: Buy or Run?

When buy and sell decisions are motivated by emotion and then amplified by mindless computer programs, stock movements can become irrational. But after the dust settles and traders gather their wits, we often find prime trading opportunities.

The starkest example of this recently is Apple (NASDAQ: AAPL), which has suffered a mini-crash in the past three weeks with shares down as much as 16% from their July 20 high.

Ironically, Apple’s violent move lower began after the company reported record Q3 earnings, beating estimates on the top and bottom line. However, it sold only 47.5 million iPhones, less than the 48.8 million analysts had expected.

Shares immediately plummeted 6.7%, which was a gross overreaction in my opinion. But the selling continued and Apple dipped below its 200-day moving average on Aug. 3. 

Many consider the 200-day to be an important trend indicator. Stocks trading above this average are said to be in an uptrend, while stocks trading below it are considered to be in a downtrend. More importantly, a downside penetration of the 200-day moving average triggers sell orders.

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So when AAPL violated this level, massive program selling kicked in, increasing bearish momentum.

All the while, the media was stirring the pot with hyperbolic headlines along the lines of “Apple Bloodbath Sheds Billions in Value.” 

But Apple is no stranger to this type of frantic crowd behavior. And I have uncovered a pattern that signals now is the perfect time to buy the stock.

Apple is what I call a “buy the rumor, sell the news” stock. By that I mean it tends to rally into earnings and product releases, but typically sells off once the news or data is released, even if it’s positive.

In fact, seven of the past eight reports saw a bid up going into the announcement, typically followed by a brief sell-off and then a continuation of the rally. In every quarter but the most recent one, AAPL was higher 30 days following its earnings report. The pre-earnings rallies are shaded in gray below.

AAPL Stock Chart

The reason this trick of the trade works is that investors tend to get overexcited ahead of a perceived event like a product release. Once the actual event takes place, stocks often sell off because the details of the event are known.

Since 2011, Apple’s major product releases have typically come in early to mid-September — when the company announces its annual update to the iPhone. And that makes sense: The iPhone generates the majority of the company’s revenue, so investors focus heavily on the fall announcement.

Because of this, AAPL has started to follow an interesting pattern where shares hit a post-earnings slump in July, begin to recover in August and hit a pre-earnings high in early September. In the past two years, this has led to average gains of 14.6% trough to peak.

Apple is approaching this fall’s announcement with earnings at near-record levels. The company is selling more iPhones than ever before, and the Apple Watch is still in its infancy.

But what I like most about Apple is the fact that its forward price-to-earnings (P/E) ratio of less than 13.5 is roughly 15% lower than it was at this time last year. In other words, even though AAPL’s price is higher than it was a year ago, we’re getting a better deal today.

I’m not alone in my bullish thesis on Apple. Even as shares continued their slide this month, there have been no downward revisions to analysts’ estimates in the past week, according to Zacks. In fact, in the past 30 days, the consensus earnings estimate has actually gone up.

Apple Earnings

Apple is trading at an attractive level with support from analysts. As we approach the announcement of the next-generation iPhone and other new products, investors should start to pile in, causing shares to shrug off their post-earnings slump. If history repeats itself, we could see a nearly 15% advance in roughly 30 to 45 days’ time.

I believe bullish logic will prevail and shares will move higher to the $130 mark, just below the recent highs of $135.

Apple is stronger than it’s ever been. Once investors start behaving rationally, shares should exceed their pre-correction high as they’ve done every time in the past. And those who didn’t will be wishing they had allocated some money to this stellar company. 

However, I’m not so sure I’d run out and buy shares of AAPL right now. Instead, I use a strategy that costs a fraction of the amount it would to purchase shares and could result in a much larger gain if AAPL hits my target.

A similar trade last year turned a 7% move in the stock into a 63% profit. And so far this year, I’ve used this strategy to make returns of up to 90.5% in just 15 days on another popular stock.

Before you consider buying AAPL shares, I urge you to take a few minutes to watch this presentation. You won’t be sorry. Click here to access it.