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Tuesday, September 25, 2012

Apple maybe dependent on the market

Now that the iPhone 5 is out, I am waiting for a re-entry point. Below are my considerations.

Technically the stock is showing weakness. Obvious initial supports start at 655 and 645 (via the 50 SMA).

The action suggests to me that Apple wants to get very oversold, and test these levels. 

There should be a technical bounce, and if market sentiment holds up, Apple should keep pushing to the low 700s. If market sentiment shifts, AAPL will test the low 600s.  Probably near the strong pre-rally base near 615.

The technicals are supported by the pattern of the trailing multiple.

In times of a healthy rallying market, like we just witnessed, AAPL has seen a multiple between 16-17.  In a weak market AAPL's trailing multiple has see an extreme low of 12.5, but typically trades near 13-14.

Now that the macro conditions are set, I want to establish the micro conditions. Apple is projecting an EPS of $7.65, with the street at 8.84. (Not extreme.)  If the street's estimates are used, AAPL will have a trailing EPS of $44.33 which would justify the follow stock price:

trailing PE of 16 = 709
trailing PE of 14.5 = 642
trailing PE of 13 = 576

At the moment, I am not expecting a market with extreme negativity. Although I am frankly very surprised the market has held up as well as it has since the last Job Number and Jobless claims figures.  Based on the Jobs data I am seeing a market that would justify a trailing multiple around 14.5 for AAPL.

If we start seeing jobs numbers that start beating to the upside again, and Jobless Claims that continue the down trend (as of now we are in a stalling pattern), then AAPL should get its higher end multiple.

IMO, the above merits a re-entry near the low/mid 600s.

When looking out two quarters, toward the end of the year, there are better numbers. If the street's estimates are used, 15.30, AAPL will have a trailing EPS of $44.33 which would justify the follow stock price:

trailing PE of 16 = 732
trailing PE of 14.5 = 663
trailing PE of 13 = 595

If anyone is willing to ride AAPL into their next quarter, with a strong market AAPL should test its highs. In a mild market, AAPL should test the mid/high 600s.   

The way I want to play AAPL is to start entering near or below 640, and hope a mild/bullish market sentiment is maintained.

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