MorningWord 12/17/12: U.S. equity markets on Friday were once again dominated by AAPL’s plunge from its all time high made in Sept, with the stock making a new 10 month closing low. Even though AAPL confounded alot of investors and pundits during its 2012 parabolic move from $400 to $700 in the first nine months of 2012, the move from $700 back down is probably going feel a lot worse. In the last week we have seen a handful of analysts lower their 12 month price targets (some below $600), lower their 2013 earnings estimates (as a result of rumored iPhone5 order cutbacks in Asia) and now just this morning a DOWNGRADE from a bulge-bracket bank (Citi downgrades to Hold and $575 target).
As My esteemed colleague Enis just said to me, “story often follows price”. Now Enis is one of those geeky stock almanac sort of guys and loves to riff with ol’ skool Wall Street sayings, but as many think Citi is probably late to the game after the stocks 25% plus decline in the last 3 months, I would suggest that to downgrade the largest market cap company in the world at one of the largest banks in the world takes some serious vetting and would likely be the result of some serious conviction by their technology research team. This doesn’t mean they are going to be right, but I would also guess if the stock drops from here to below $450 that these guys would likely to slap a Buy rating back on the stock.
AAPL traded below $500 amidst all these headlines including AAPL’s press release that the company sold 2 million iPhone5’s in their opening weekend in China. Now the stock is actually trading up a couple bucks at $511 at 9am, I would suggest that the stock will likely break back below $500 and will need to find some footing early today or things could once again get ugly. The bulls and the bears will be pitted in a fierce battle today, and from a technical perspective it is going to be an uphill battle for the Bulls from where I am sitting. The fever has broken, the momentum has shifted, and if the stock can’t react positively to positive news, then watch out below. By no means do I think AAPL is a good press here on the short side, but for nimble traders (with defined risk, likely legging into weekly put spreads) it has been worth the shot. These are the sorts of trades that you can only risk what you are willing to lose, because much like the reversal we saw last month from $505, the turn will happen quickly and will likely be an intra-day reversal and if you are not in front of you screen to catch to action then you are likely to screw it up.
I am playing for the AAPL break of $500 through QQQ put spreads (laid out here), but I am very cautious to press the 10 month lows and at some point will look to be outright bullish in the name. On Friday I decided to play AAPL component supplier QCOM with a bullish slant looking at the Jan13 expiration as I felt the chip maker was being unfairly beaten up in sympathy with AAPL. I Traded 2 structures, the first was a Dec/Jan13 62.5 call calendar and the second was a Jan13 62.50/65 call spread. Again, just as I am not willing to step in and Press the short in AAPL, I don’t think it would be that prudent to try to “catch a falling knife” with an outright long in QCOM, as the stock’s technical set up could look challenged.