Apple aftershock sets shares on course for $92

Apple shares look set to extend Tuesday’s 8% after-hours trading fall further in the near-term.

This comes after the group’s first-ever decline in iPhone sales triggered its first quarterly sales decline in 13 years, whilst its first weaker earnings per share since Q4 2013, also marked the first time it missed Wall St. EPS expectations since Q4 2012.

Apple’s main Q2 results are summarised below.

• Revenue: $50.56bn down 25.6% vs. market forecasts of $51.55bn
• Earnings Per Share (EPS): $1.90, down 18% vs. forecasts between $1.98-$2
• Net Income: $10.516bn, down 22.5%, vs. forecasts of $10.977bn
• Gross Profit margin: 39.4% vs. forecasts of 39.6% and 40.8% in Q2 2015
• iPhone sales: 51.2 million, above average forecast of 50 million, but well short of 61.2 million sold in Q2 2015

As per Q1, Apple partly blamed the weak quarter on a sales drop of more than 25% in its second-largest single market outside of the United States, China, the source of the group’s record sales growth a couple of years ago. Current global slack was also expected to bring a further quarter of disappointing revenues, Apple said. Q3 sales would total $41bn to $43bn, the group said, well short of Wall St.’s $49.95bn average, according to Reuters.

There were some bright spots. Services, comprising Music, Apple Pay, App Store, grew revenue by 20% to $6bn, trumping iMac and iPad sales. Though given the iPhone’s dominant role in Apple revenues—recently estimated to account for about 70%—these were not enough to offset bad handset sales, and have failed to mitigate disappointment with the overall results. Neither have announcements that Apple will raise its share buyback program by $50bn and its quarterly dividend by 10%, which some market participants had been expecting.

The extent that traders had been wrong-footed became clear in light of the results. On Tuesday evening we noted that trade in Apple options reflected remarkable optimism, with unusually light bearish positioning despite low earnings expectations. This suggested participants were not anticipating a let-down of the magnitude Apple reported. Skilled options traders will not necessarily throw in the towel after the failure of bullish at-the-money strategies (which predominated before Apple’s report). Instead, ‘repair’ strategies, many of which include the addition of more than one simultaneous trade, can be adopted. These can increase volatility in the underlying stock.
Given AAPL’s relatively heavy weighting in major US indices—between 3%-11.4%—increased volatility could seep into wider stock markets.

From a technical perspective, we think Apple’s weekly chart is a good place to start.



We draw attention to the failure of the shares about four weeks ago to break above (lilac coloured) 100 and (yellow) 50-period moving averages (MA) which coincided with an emerging downward trend from the week ending 24th July 2015. Note the steepness of the downward leg of our momentum gauge, the Slow Stochastic Oscillator sub-chart, even in weekly intervals.

These elements suggest the stock may test its crucial 200-week moving average (dark blue line) again, in reasonably short order, after doing so in February.

Will we see the stock break below the 200-week line for the first time since March 2009?
Logically, the risk of a breach this time could be greater than in late August 2015, almost two months before Apple reported its quarter ending in September. Also consider that at that time, whilst its results were deemed by the market to be lacklustre, they were still stronger year-on-year and met or exceeded the group’s expectations.

That was not the case with Apple’s Q2 2016 results.
Therefore, a defensive (or resigned) stance might be wise for investors in the near term, as the shares approach the 200-week area, which, if broken, would typically presage an extended decline.