Apple shares complete the “dead cross” – SBM makes them a Trading Buy at $533!

UPDATE – Apple shares just come in $10 easier at $522 – real battle going on in the market today. We are sat waiting in the wings for the buy down if they get towards the $500 level…

At face value, the so called “death cross” (when the 50 day simple moving average crosses down through the 200 day moving average and the actual stock price trades below both of these) in Apple shares that occurred in Friday (shown in the chart above) is an ominous sign. We can also see that the stock is sat absolutely slap bang on the support level of $533. There’s no 2 takes here on the stock now, we are either hard down to $400 (most likely on a warning of slowing sales/profits) or a sharp rally back over $600.

There has been quite a bit of commentary recently in the wider financial press regarding the effectiveness of the 200 day moving average and breaks of it to the downside and similarly the death cross. The FTSE cut down through the 200 day moving average (currently around 5720) only 3 weeks ago and then rallied hard back above it. Similarly, a death cross occurred on the S&P500 in August of last year – right at the short term nadir of the market as the chart below shows. It seems that when sentiment is bearish and technicals on the oversold side that a death cross is, in fact, a bull sign. We lean to this with regards to Apple as not only is sentiment bearish and the technical measures predominantly of an oversold nature, but a lot of the explanation for the recent selling is related to year end Capital Gains Tax positioning in the US with fears of a new rise in the CGT rate in 2013 too.

On pure valuation grounds too, as the table below pays testimony too, Apple are cheap. Ex cash they are trading on almost a 40% discount to the S&P500 of just 7.5 times. With a PEG of just 0.5 times next year we think the current level is a good buying opportunity and accordingly we open a fresh Trading Buy position of two thirds of our position size and so giving us the flexibility to buy down a dip back towards the $500 level.

In keeping with our prudent and risk mitigating approach (longevity is everything) then we are additionally creating a Feb $490 v $440 1 X 2 Bear Put Spread just in case there is a profits warning in the New Year reasoning that $440 is likely to be a floor for the stock even on an armaggedon scenario of a 40% wipeout of profits that would still only put Apple then on 10 times ex cash profits – a 20% discount to expected S&P 500 2013 earnings. 

What also proved an interesting exercise is to look back at the times since 1990 that Apple made a death cross. The results are not surprising – basically the median returns over 1,3 & 6 months are very impressive. It is seemingly only over the 2 weeks period one must be careful and this ties in with our approach to average our position in over 2 tranches.

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