Diary of a Financier

Revival of the Apple analogue

In Capital Markets on Tue 17 Sep 2013 at 17:18

I’m hereby reviving the Apple ($AAPL) vs Green Mountain Coffee Roasters ($GMCR) momentum boom/bust analogue. With the passage of time, I was able to recalibrate the comparison, which allowed me to resume my tracking of the guide.

I notice that at this point of the “bust” progression, both AAPL and GMCR resumed their double dip after a sucker’s rally retraced 38.2% (a Fibonacci level) of the drawdown from their tops. The weekly charts show how close AAPL is tracking GMCR’s precedent from 2012:

GMRC v AAPL analogue (weekly)

GMRC v AAPL analogue (weekly)

Were AAPL to keep following this GMCR analogue, the bottom is a long way down. GMCR fell 75% from the top of its dead-cat-bounce, ultimately retracing 100% of its gains after the 2009 breakout. The equivalent carnage¹ in AAPL would put its downside target at $127, which would coincidentally retrace 100% of AAPL’s breakout since 2008.

If I trusted the analogue more than I do, I would short AAPL; I don’t fully trust the analogue though. There are differences among GMCR 2012 and AAPL 2013 that make it hard for me to imagine AAPL crashing all the way down to $127.

First, AAPL has underlying fundamentals–something that investors were prodding for in yesteryear’s GMCR, therefore enabling David Einhorn’s public wrangling to move the stock in the direction of his short position. AAPL is [still] fundamentally cheap, but the trading activity does suggest it’s subject to the psychology of masses right now. It’s on a product treadmill. Not even Carl Icahn can help it recover $500, although I expect his interest in AAPL is for brokering an acquisition of Nuance ($NUAN). AAPL needs to lock-up a deal with China Mobile and offer something unforseen–a spectacular innovation that they’ve failed to yield since Steve Jobs’ passing. (For example, the fingerprint technology in their new 5S is a wide moat. Just imagine: in 15 years you won’t even have a signature anymore; you’ll use your fingerprint to sign documents and bills. But, it’s nothing we didn’t see coming, and it’s nothing that competitors can’t/won’t copy.)

Second, there’s a golden cross in AAPL’s daily SMA–something that GMCR didn’t exhibit. GMRC v AAPL analogue (daily) I rarely trust golden crosses or death crosses, especially for a stock as widely tracked as AAPL, because signals this popular are prone to failure.

Third, I have to acknowledge the AAPL vs WTI Crude Oil analogue touted by Erik Swarts over at Market Anthropology, which finds an ultimate bottom at only $435-40 before AAPL resumes an upward trajectory. The only strike against his analysis is that mine fits AAPL to a counterpart that’s analagous for a longer period of time: mine being AAPL 2008-13 vs GMCR 2009-12, as opposed to his AAPL 2011-13 vs WTI 2007-09.

~~~~

Recall that we started a position in AAPL at the end of May, then added to the position in July. While none of the signs discussed herein are enough to give me material conviction, the balance of this information is enough to have me look for an exit point. Per the daily analogue, we plan on selling our entire AAPL position on a short term rally >$470:

GMCR v AAPL analogue (daily, overlay)

GMCR v AAPL analogue (daily, overlay)

If you need attribution for that rally, perhaps the iOS 7 release (9/18) or the new iPhone 5C and 5S releases will suffice.

Right now, the likely candidate to replace AAPL in our portfolio is $EBAY. We don’t necessarily look to fill a sleeve or a sector allocation like this, and we won’t necessarily swap AAPL for EBAY straight-up in the same trading day or week. We treat each position autonomously, and if we [for some reason] were to need equity exposure, we’d employ our index ETF, $IWV. However, it just so happens that my mental accounting sees these two singlenames trading places between the bench and the playing field in the coming weeks.

–Romeo

¹$17.49 / $69.75 = 75% GMCR retracement * $507.74 = $127 AAPL downside target

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  1. Update…

  2. Update 2…

    Mea culpa, as Erik Swarts’ (Market Anthropology) analogue wins: $AAPL ended trading straight up, breaking its lockstep with my analogue & playing into his.

    http://www.marketanthropology.com/2013/10/signs-of-times.html

  3. […] Apple ($AAPL) analogue since 9/2013, after which my expectation was [delightfully] disproved.  As noted when I caught whiff of the bull reversal, we held our AAPL position for a subsequent breakout, and […]

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