Sell Apple Before the July 19 Crash

Jared Levy, Editor, WaveStrength Options Weekly
Tuesday, 12 July 2011

Apple iPhone The past few days have shown the first cracks in the market’s newly formed foundation. There are more to come.

Two weeks ago everyone got über-confident and started buying stocks like crazy.

The S&P 500 gained 7% in eight trading days… an amazing feat considering the current state of things. This brought the major averages back above their 50-day moving averages, a bullish sign for shorter-term investors.

The broad market has remained amazingly resilient in the face of poor economic data here in the U.S. as well as geo-political issues and economic catastrophes (like Greece) around the world.

Nonfarm payroll data came in at its worst level in almost two years. And consumer confidence here in the States has been moving steadily lower since February.

And yet, investors still have an appetite for risk. The pros call this the “risk on” trade. Investors are buying stocks ignoring the economic data.

When the risk is on, the stakes are high and companies must deliver results. Earnings season kicked off yesterday with Alcoa (AA:NYSE). If a company doesn’t deliver more than is expected or misses a forecast altogether, crashes (small and large) can occur, especially in skittish markets like the one we are in now. In stocks with elevated P/E ratios like Netflix (NFLX:NASDAQ) and LinkedIn (LNKD:NYSE), this is even more likely to happen.

But would you believe that Apple (AAPL:NASDAQ) could be on the chopping block, too?

Why I Am Scared of Apple

Let me first say that I am a huge fan of Apple. It set the bar for computers and electronics with the Lisa (pre-Macintosh) back in the ’80s. After falling out of favor in the ’90s, the company has reclaimed its role as demigod of the tech sector.

Even with this status, Apple could be dangerous, at least over the next week or two. The Apple iPhone is its top product and accounts for 54% of its share price (forward estimate). But the Apple iPhone is under attack. Dozens of smartphone makers like Motorola, Samsung, HTC, LG, Sony and others are all running Google’s hot Android operating system.

Even though Apple overtook Research in Motion (RIMM:NASDAQ) in market share, Apple still only controls 26% of the smartphone market compared to Android, the leader with 38%.

Apple Chart
Image Source: TREFIS

Apple is responding by letting other carriers offer data for the Apple iPad. I have even heard serious rumors that the Apple iPad and iPhone may be coming to Sprint, the last of the Mohicans when it comes to unlimited data plans. (These rumors are also flying around on Sprint’s internal chats…)

As you may or may not know, Apple also constructed a massive data center to house an armada of servers for its iCloud service.

Apple is trying to increase sales of its most valuable asset (iPhone) and grow other business segments because it needs a stellar earnings report. But shrinking margins, increased competition and aging product lines could knock Apple off its pedestal.

The second problem is expectations for theApple iPhone 5.

(Don’t forget to sign up for Smart Investing Daily and let me and fellow editor Sara Nunnally simplify the market for you with our easy-to-understand articles.)

Apple iPhone 5

Apple’s minions can’t wait to get their hands on the new Apple iPhone 5. I am curious what features the iPhone 5 will have. One feature many are talking about is 4G capability, which could add about $39 in manufacturing costs per phone. That won’t be good for margins.

I’m sure it will be cool, but with all the iPhone owners already out there and a slew of very sleek, fast and inexpensive smartphones from the likes of HTC and others, will the iPhone 5 get the same reception?

I don’t think so…

Let’s review some iPhone “facts”:

The glass on the iPhone 4 was the strongest ever and resists breaking better than any other phone. I even heard people call it “helicopter glass.”
1. My iPhone 4 glass broke twice and cracked screens seem to be the norm among users unless you have the “otter box” cover, which costs about $40 and adds about an inch all around in size.
2. I wouldn’t want to be in a helicopter made of iPhone 4 glass.
The “retina” display is the best display you can get. The human eye can’t sense any more detail beyond it.
1. How do you improve on that?
The iPhone is infamous for dropped calls — so they “fixed” that and engineered the most amazing antenna ever made that is incorporated into the housing.
1. Whoops, the housing antenna actually causes calls to be dropped when you touch a certain area.
It’s the most magical and amazing device ever.
1. My phone (HTC EVO 3D) does everything the iPhone does, but faster and takes 3-D pictures! (Top that, Steve Jobs!)

Apple is its own worst enemy. Like an Olympic gold medalist, every subtle move and tactic is scrutinized. Even the slightest misstep is exaggerated by judges. Apple has changed the way we interact as humans and has created some of the most influential products of the past century… But no human or stock is invincible!

For now, investors have to be cautious in the near term. The bar has been set high. While I don’t think Apple will fault completely, it might just tap that bar going over the top on July 19, when it reports earnings.

Trader’s Tip

Take a look at this chart…

Apple Chart
View Larger Chart

Apple goes through a short sell-off after earnings, usually lasting a couple days to a week. Most times, the stock is bought right up until the earnings report. Apple has beat analysts’ estimates every time; however, the stock has typically moved lower right after earnings.

Look at the arrows in the chart. They mark when earnings reports were released. History tends to repeat itself in the market.

My long-term view of Apple is still bullish, but if we take what we have learned from the past and perhaps some practical data from the present, we can make the most of our investment decisions.

Sell Apple before it reports earnings… You may be able buy it back a couple days later at a much better price.

Editor’s Note: Did you know Jared was once a market maker for Apple’s options? When it comes to this tech bellwether, he knows his stuff. His track record at WaveStrength Options Weekly proves it… with the average trade worth gains of 21%, often in a week or less.

Jared’s technique is unusual. He’s conservative. He’s safe. Yet his readers are treated to double- and triple-digit winners. To see how he does it and get seven months of WaveStrength Options Weekly essentially free, follow the link.

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