Apple just signaled the bottom you're waiting for

Investors shrugged off the loss of the Justice Department's case of price fixing, giving you the green light to buy.

By TheStreet Staff Jul 11, 2013 12:04PM

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By Robert Weinstein


A phenomenon Wall Street insiders know is that markets peak on good news and bottom on bad news. Market-timing legend Tom DeMark of Market Studies revealed in "New Market Timing Techniques: Innovative Studies in Market Rhythm & Price Exhaustion" an initially counterintuitive correlation between the appearance of positive news and the price reaching a summit, or vice-versa.


My oversimplification notwithstanding, DeMark claims that a stock (or any traded security) reaches a peak because the "last buyer" comes on board. Conversely, a stock bottoms when the "last seller" throws in the towel and gets out. Obviously, the terms "last buyer/seller" is used figuratively, but the point is, when there are so many buyers already in a stock that positive news isn't able to push the shares higher (because "no one is left to buy"), there is no other direction for the stock to go but down.

Once the trend shifts lower, the slightest negative news will accelerate the process. As stop losses are triggered and sentiment changes, you are left with a chart pattern that resembles a mountain. The inverse is also true.

If you examine the bottoming of a long-term chart pattern that looks like the letter "V," you will sometimes see that near the date of the exact bottom is significantly negative news, but the shares actually remain flat or appreciate.


Let's take this theory one step further, with Apple (AAPL) as an example.


Take a look at some of the negative articles about Apple after losing a court battle with the Justice Department:

  • Judge Comes Down 'Hard' on Apple in E-Book Ruling (WSJ)

  • Apple Loses E-Book Trial (TheStreet)

  • Apple Price-Fixing Verdict May Not Result in Cheaper E-Books (CNBC)

  • The Apple e-Book Case Is Headed for the 2nd Circuit (Fortune)

It's fair to say that Apple's loss was widely covered, and Apple being Apple, no one missed the news. In other words, all else being equal, the market's participating buyers and sellers fully understand that Apple lost a significant court case, and, as of my writing this Wednesday, the shares were trading slightly higher.


Even more noteworthy is, no one knows what the damages will be. How about civil suits? Losing the case opens the door for civil litigators chomping at the bit to take a bite out of Apple (rinky-dink pun I know). Wall Street hates uncertainty, and yet, Apple investors were delivered two-scoops of uncertainty Wednesday, and the shares hardly flinched.

aapl free cash flow

This is the classic "markets bottom on negative news" that DeMark writes about. After nine months of arduous declines, Wednesday's event indicates that investors are finding value in Apple shares regardless of the uncertainty that awaits. It's hard to find a clearer sign that Apple has bottomed, but there is another.

 

The Apple Inc. logo is displayed on the back of the new MacBook Pro David Paul Morris/Bloomberg via Getty ImagesCanaccord Genuity analyst T. Michael Walkley lowered estimates and its price target for Apple Wednesday (StreetInsider). Walkley maintains a buy rating but lowered the price target from $560 to $530 a share. Granted that's not much of a change and shadows the court ruling, but helps crystallize and clarify the market doesn't actually care anymore. Especially when Apple is only trading slightly higher than $400 a share.

 

Investors should exploit the conspicuous signal the market is proclaiming that even unwelcomed news isn't enough to drive the shares lower. Like watching fireworks last week, you can't miss it. Two weeks ago, I suggested selling put options in Apple to gain a bullish position with decreased risk. The idea was to sell October $400 strike price puts for $27.10 or more (opening fill price was $30). At a current trading price under $15, it's working out well.

 

It's not too late to enter, and in fact, watch over the next few days as the market digests the ramifications of the court case. If shares continue higher, I say DeMark's observations hold true once again.  

 

At the time of publication the author had no position in any of the stocks mentioned.

 

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5Comments
Jul 11, 2013 12:44PM
avatar
If only it was that simple we'd all be billionaires. Competition, earnings results and valuation  might matter too.
Jul 11, 2013 4:56PM
avatar
Ya a company doesn't get to pick when their stock bottoms, the market does that.  Thinking the cell phone/gadget market is becoming saturated and I'm not sure anyone of them can really make any significant gains barring a technology break through by one of them.
Jul 11, 2013 2:03PM
avatar

The bottom. Like it's something they can control. Oh wait... as long as Bernanke is funding business and not economy, I guess they can.

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