March 24, 2012

Is the current Apple trend really your friend?

One way to find out if you are going to buy or sell a stock is to watch the current trend of the stock. If the trend is up, you should buy - and if the trend is down, you should sell. Traders and investors often say:
"Let the trend be your friend"

The one thing we know for sure is that a trend always ends sometimes in the future and it often happens when it is at least expected by everyone. One recent stock which has been moving up almost forever is Apple. The Apple stock has increased with 50 percent so far in 2012, and the market value is currently larger compared to the entire retail sector in the US. Can we expect more from Apple or will the current trend soon end up in a crash? 

This week, a small flash crash occurred in the Apple stock when it fell with 9 percent in a short amount of time. This could be a sign that investors and traders are beginning to feel nervous about the current trend. If you look at the chart showing the Apple stock, you can easily see that the movement up has been parabolic. Parabolic movements often ends with a crash like the parabolic movement in silver last year and the parabolic movements of tech stocks during the tech bubble in 2000. 

Source: Chartpattern
Some signs that the current trend may be over:
  • About 1/3 of the hedge funds own the stock. One hedge fund has invested $5.1 billion in Apple. If everyone already have bought the stock - who's going to buy it to increase the price?
  • Apple seems to be out of big new ideas. They have earlier been re-invested their cash in the company - but they have now decided to distribute some of the cash to the share holders
  • It is hard to determine if Apple can come up with new innovative and great products without Steve Jobs 
Some signs that the current trend may continue:
  • 2/3 of the hedge funds have not invested in the stock and many new dividend funds may be interested in the stock when Apple now distributes some of their money to their shareholders
  • Several analysts believes that Apple can have a market value of $1 trillion. The current market value is about $550 billion. Apple can probably find some new growth in China and Brazil. People from China like to impress other people, and therefore they want to own expensive products that will distinguish them. They also pay close attention to building and maintaining their relationships with others - and Apple products are usually given as presents to good friends 
  • The current p/e-ratio is 22 and as long as the growth in earnings each year is around that number, Apple is not overvalued
  • It is hard to compete with the amount of custom apps available to Apple products. Customers may buy Apple products just because of the apps available - not that the iPhone is better compared to the latest Nokia  
Update: Added some more information about China