Schaeffer's Trading Floor Blog

Weekly Contrarian: Should Apple Inc. (AAPL) Bulls Take a Breather?

Sentiment remains positive, despite AAPL's recent downtrend

by 1/3/2013 12:18 PM
Stocks quoted in this article:

SmartMoney recently featured an article entitled, "Apple Investors: Should You Panic? ", in which the author explains why investors need to keep a wary eye trained on Apple Inc. (NASDAQ:AAPL - 547.29) in the near term. For starters, the stock has been in a steady downtrend since September. Despite this recent pullback, the writer points out that AAPL is still outpacing a number of Dow components in terms of market value, making it hard for investors to turn a big profit. Additionally, the tech titan's once-innovative products have now become mainstream commodities, which -- along with escalating competition -- eventually will pressure the prices (and AAPL's top line) lower.

The contributor does contend that at current levels, AAPL's valuation is affordable. Plus, a number of products in the company's pipeline have the potential to dominate the market, namely Apple TV. However, the author concludes that it is always prudent to be "skeptical of any stock everyone loves, and I am not surprised at the recent reversal hitting Apple."

Takeaway

AAPL's time on the charts has been fodder for the Street for some time now. After a nearly three-year meteoric rise, the stock began to lose steam in late September. In fact, the equity has surrendered nearly 29% of its value since hitting a record peak of $705.07 on Sept. 21. Plus, as Schaeffer's Senior Options Strategist Tony Venosa noted yesterday, AAPL is currently doing battle with its 40-day moving average -- a trendline that quickly rejected the stock's early December rally attempt.

Despite this recent stumble, AAPL's sentiment backdrop reveals the majority of Wall Street expects the tech titan to resume its uptrend. In the options pits, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 142 calls for every 100 puts during the past 20 sessions. What's more, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.68 ranks in the 13th percentile of its annual range. In other words, short-term speculators are more call-heavy than usual toward AAPL.

Elsewhere, short interest declined 11.6% during the last two reporting periods, and now accounts for a slight 2% of the stock's available float. Not only was AAPL unable to capitalize on this recent burst of buying power, but it would take less than one session to cover the remaining shorted shares, at the security's average daily pace of trading. In other words, there is little sideline cash available to help fuel any potential rally attempts in the short term.

Additionally, the equity may find itself subject to a round of downgrades and/or price target cuts in the near future, should it continue to chart a path lower. The stock currently sports 36 "buy" or better ratings, compared to just two "holds," and not a single "sell." Also, the consensus 12-month price target of $741.17 represents a more than 35% premium to AAPL's current perch, and stands in territory the equity has not yet explored. Going forward, the security could encounter some contrarian headwinds, should any of these hopeful holdouts follow in the footsteps of Raymond James, which cut its price target on AAPL yesterday.


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