Now that Apple (AAPL) is headed to 600, there is a lot of fear that Apple is going to top out and never going higher. A lot of very smart people have this idea that Apple has been driven under a 13 PE ratio and it will never again run back up to a 16 or 17 PE ratio.
It’s important to remember that the professionals do not make the big gains by allowing Apple to languish in the 500′s for any length of time. They did very well by running Apple down, they will do very well running Apple up.
Look at the series of highs and lows that they have driven Apple in the last 2 years. Let’s start with the high of 426.70 on 10/17/2011, which was a PE ratio of 16.89. They then pushed Apple down to a low of 363.42 on 11/25/2011 which was a PE ratio of 13.13. Then they pushed it back up to a high of 644 on 4/10/12 which was a PE of 18.34. They turned around and pushed it to a low of 528 on 5/28/2012 which was a PE ratio of 12.89. Then up they go to a high of 619.87 on 7/10/2012 which was a PE ratio of 15.12. Then they push it down to a low of 570 on 7/25/2012 which was a PE ratio of 13.40. Then up we go to a high of 705 on 9/21/2012 which was a PE ratio of 16.57. Then they pushed it down to a low of 505.75 on 11/16/2012 which was a PE ratio of 11.45. Is a light bulb going off? This is a giant game that the professionals play to create wealth for themselves and that wealth comes directly out of the pocketbooks of the retail trader.
This game is played to perfection by the pros. They know that the average investor is too frighterned to buy near the bottom. In fact, the average investor is selling near the bottom because he is so terrified. I know millions of investors have been selling as Apple plunged to 505. How many of those same investors have bought down here. Less than 5%. It is sad but true. The consensus is Apple is finally broken and it is now fairly valued. So many investors buy into all the negative news stories put out by the Hedge Funds and Big Bank Trading desks and think Apple has a fair valuation and it will not be going much higher any time soon. First of all the pros could care less about fair valuation. They only care about making money and they do that by running Apple up and then running it down. Apple is fairly valued about 5% of the time. The rest of the time it is either underpriced or overpriced.
The average retail investor will not buy Apple until it is well above 620 and it has proven itself. They will not really buy Apple until it is racing from 650 to 700. If it gets over 700, they will really start buying it, thinking it is going to the moon. Now that we are heading up, the Hedge Funds and Big Bank Trading desks will start running incredibly positive stories on Apple. Why? because they are now long and will stay long until the retail public really piles into Apple because it is the best company in the world. Then all of a sudden, they will take their profits and go short and start running Apple down again.
This is why I know for a fact that Apple will recover quicker than any of you imagine and why Apple will end up higher than any of you imagine. I cannot predict when Apple will reach it’s high or how high of a PE ratio it will achieve. That part is unpredictable. What I am sure of is that Apple will keep going up and it will go higher than most people predict. At some point it will top out and we will start this roller coaster ride all over again.
What are some guideposts that I will be watching? There are 2 time periods we have to watch. Right before Jan earnings we have Jan options expiration and right after Jan earnings we have the truth known as Q1 earnings which everyone has to acknowledge whether they like it or not. Apple could put in a high before Jan options expiration and sell off into expiration and earnings or it could just keep running up into earnings. That part is unknowable. Apple could be at a 15 PE ratio before earnings which is 662 or a 15.5 PE ratio which is 684. Jan earnings will have a huge affect on Apple; we could see a 50-100 run to the upside or a 50-100 gap down and run to the downside. I believe there is about a 90% chance the result will be positive. Regardless, sometime in late December to early February we will see Apple put in a new high before it starts the sell off and negative news cycle all over again.
For you retail investors, quit trying to figure out what is a fair value for Apple. Quit trying to analyze all the news stories and figure what Apple’s future is. This all plays into the game that the professional traders are playing on you. Just focus on Apple’s trends and PE ratios. Is the trend up or down? Is Apple selling for a 12 or 13 PE ratio or a 16 or 17 PE ratio. It’s that simple. Don’t complicate this. You have been buying when Apple has been in an uptrend for months and the PE ratio is 15,16,or 17 and the news is incredibly bullish. You have been selling when Apple has been selling off for months and the news is incredibly negative and the PE ratio is 13 or 12. You have got to reverse this psychology and realize this is just a game that is played over and over again. If you think that this time is different, you have really bought into the pros storyline. The game never changes.
Disclaimer: The information / strategies presented are my own opinions. You should do your own due diligence and analysis of any investment strategy. I cannot guarantee you will be successful in following any of these strategies. Many option strategies may risk the entire capital invested.