Apple: Sweet Treat, or Too Much of a Good Thing?

One day recently, a colleague noted a discrepancy in the intraday price action on the S&P 500 versus the Dow Industrials. But upon further review, it appears his analysis overlooked one simple explanation: Apple (AAPL).

Apple was having a big day. (I can’t remember if it was up or down, but I’d bet on the former.) Its performance made up the relative difference between price action in the two indices that day, since the S&P includes holdings in Apple, while the Dow does not.

Apple’s run higher has been one for the record books. Its rally over the last three-plus years is one that only a few lucky investors were able to capture in any significant proportion. But Apple has inspired nearly every investor to not only dabble in its shares or options, but also to seek the “next Apple.”

In my view, looking elsewhere for an Apple-like opportunity might mean missing out on the next big move. But that doesn’t necessarily mean the stock is a buy.

Quite the opposite, in fact. Here’s why …

Why Apple is Still the Next Apple …
But Not Quite the Way You’d Think

Even though the overall stock market has shown gains in this era of money-printing and loose central banking, the performance of the indices can’t hold a candle to the performance of Apple.

Assuming central banks acknowledge that their accommodation mostly influences financial markets … and assuming that this influence has trickle-down benefits for the underlying economy … the central banks should be thankful for the “wealth effect” coming just from watching Apple’s meteoric rise.

But there are a number of items in view right now that just may —  MAY —  indicate a change in direction for Apple and a rethink from investors taking their general market sentiment cues from the iconic technological powerhouse.

So, Apple may still be the next Apple … just as a downside play.

You probably couldn’t avoid hearing about Apple’s spectacular earnings last week. But from here, I begin to wonder whether Apple’s business performance is already factored into its share price.

I’d like to say yes. And I’d like to say Apple’s share price is going to drop sharply. But that reasoning, in and of itself, may be wishful thinking.

That’s why I am also looking intently at the technical price action. A few weeks ago, my dad and colleague Jack Crooks noted the similarities between the parabolic rise of Apple and the similar parabolic rise of the Nasdaq just prior to the tech-bubble burst.

Here’s a chart of the Nasdaq then:

And here’s a chart of Apple, prior to the recent pullback from the high:

OK, fine — I’ve been able to find two parabolic rises and produce those two charts. But that doesn’t necessarily mean anything … right?

Right. But the recent price action in Apple is worth watching for clues ahead of the next big price move.

Now, this may sound elementary, but here is the psychology behind the recent action:

Next:

Next:

Of course, if a dramatic plunge does not materialize soon, say within the next 10 days, a new high and continued rise may be inevitable.

To bring an eternal element to this psychological set-up, consider the reaction to the Federal Open Market Committee last week. The FOMC didn’t offer up anything new, but the Fed chairman dished out plenty of reassurances for the market.

The subsequent rally began to look like an obvious trade.

But if Apple, the stock of all stocks, isn’t playing along — it hasn’t traded above $600 since April 27 — then might there be questions about the market’s kneejerk reaction to the Fed last week?

Last chart — Nasdaq after the parabolic rise:

Who wants to take a bite out of Apple now?

I think Apple will continue to be a bellwether for risk appetite, especially if it turns sharply lower. You can get exposure to a falling Apple – and a technology sector whose shares would likely be dragged lower as well – with options, whether by buying puts on the stock itself or on the Nasdaq, where AAPL is heavily weighted, via the Nasdaq-100 Index (NDX). Another way would be to buy calls on an inverse ETF that shorts technology, such as the ProShares Short QQQ (PSQ).

There are a few other ways to play it too. If I see the signal I’m looking for in AAPL for a break lower, I have a specific ETF option trade ready for my Master Trader subscribers, should Apple turn out to be less polished than poisoned. To be among the first to get all my newest ETF option trades, click here to take my service for a test-drive today!

Best,

JR