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Thinking the unthinkable about Apple

October 12, 2022

Apple and Microsoft between them account for almost 24pc of the Nasdaq 100 by weighting. The Microsoft chart already looks weak and analysts are worried about faltering sales of desktop computers affecting Microsoft’s software business. Biggest of all is Apple and until recently the chart was holding up well even though the Coppock indicator is falling and close to becoming negative.

The chart is testing strong support around $135. A feature of bear markets is that support levels eventually give way. If there is a breakdown and it is sharp and on high volume that would be an alarming development. Apple is due to report on 3 November and investors will want to see good news both on current trading and on prospects.

Not long ago Apple looked worth buying on income grounds with a forecast 2022 dividend yield of 0.65pc rising to 0.76pc by 2024; that no longer looks so good with yields on 10 year US Treasuries approaching four per cent.

One problem is that Apple shares look like a one way bet. It is hard to see the shares rising sharply but if they break down, watch out.

One interesting article I read on Apple said the company is in transition from the product side (iPhones, iMac, iPads, iWatches, AirPods etc.) driving growth to one where the services business (the services segment includes the App Store, AppleCare, iCloud, Apple Pay, Apple Music, Apple TV+, Apple Arcade, and other offerings) drives growing and recurring subscription income. Over time this could create huge value for shareholders but the transition may be difficult, especially if a global slowdown in demand for premium products lies ahead.

The difference between me and the analyst community is that I make no attempt to value stocks. It is a lot of work, requires making huge assumptions about the future and is not very helpful in telling you what is going to happen to the share price. I prefer a mixture of common sense and charts. Common sense tells me that in an ongoing bear market all shares are at risk.

The chart tells me that Apple has been heading broadly lower since January 2022 with an attempt at a rally which appears to have failed. After trying to complete a golden cross the moving averages have reversed direction and completed a dead cross.

A second potential negative lies with trend line analysis. The price broke an important rising trend line when it fell below $160 in May 2022. There is now another important trend line which would be broken by a fall below $136 v around $140 currently. My guess is that if the price falls sharply below $136 it is heading significantly lower, perhaps even below $100.

Strategy

Apple began a huge bull run in April 2003, when the price, adjusted for subsequent share splits, was 25 cents. It is currently up 560 times. Nothing specific happened in April 2003 to influence the share price but Steve Jobs became CEO again in July 1997 and by the beginning of the new millennium the company had moved back into profit and was launching a whole series of exciting new products . In January 2007 the company launched the iPhone, which sold 270,000 units during the first 30 hours of sales and was described as a game changer for the industry.

There is no question that Apple is a phenomenal company and Job’s successor, Tim Cook, has proved a great CEO. But that doesn’t mean the shares can’t fall. In bear markets, when the police raid the brothels, they take all the girls.

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