Apple Inc. (AAPL) Stock Hits All-Time Highs But Looks Exhausted
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Apple Inc. (NASDAQ:AAPL) closed at new all-time high yesterday, trading over $161 for the first time ever. And at first glance, all may seem good for the rally in AAPL stock to continue.
RBC Capital analysts have jumped out Wednesday morning to say they believe Apple can become the first company to reach $1 trillion in market cap. They think Apple has more upside ahead of the launch of what’s expected to be the iPhone 8, and that improvements in China are on the horizon.
Meanwhile, on the technical front, three straight up days after Apple shares held support at the $156 area lent credence to the notion that the latest uptrend had legs.
A closer examination, however, indicates that both the technicals and fundamentals point to a period on sideways consolidation in AAPL over the coming few weeks.
While the latest earnings report included beats on both the top and bottom lines, iPhone sales barely met analysts’ reduced estimates of 41 million. China continues to underperform, with revenue missing badly at $8 billion versus expectations of $8.57 billion.
AAPL stock is no longer cheap, either, from a valuation perspective. The current price-to-earnings ratio is now over 18 and fast approaching its highest level of the past five years. The last time Apple stock carried such a lofty valuation (November 2014) proved to be a significant intermediate-term top in AAPL stock.
Technical analysis paints a similar picture, showing that the rally in AAPL may have reached a zenith.
A quick comparison to the rally following the previous earnings report from May 2 is telling and also the last time AAPL reached an overbought reading using 9-day Relative Strength Index (RSI). Both rallies were of a near-identical magnitude before running into resistance.
Yesterday’s price action was a major reversal, with Apple stock trading up to $161.83 before reversing course and closing well off the highs at $160.08. This type of price action is usually a reliable indicator that the rally may be exhausted.
Before all the Apple aficionados get in a lather about my less-than-bullish near-term outlook on Apple, remember I am looking for AAPL stock to consolidate, not crash. Call me old school, but I still think stocks sometimes don’t go up in a straight line forever.
To position for a period of sideways price action, I prefer a call credit spread. Implied volatility on Apple’s options remains somewhat elevated at the 48% percentile, so option selling still makes a lot of sense.
How to Trade AAPL Stock
Buy the Aug $165 calls and sell the Aug $162.50 calls for a 45-cent net credit.
Maximum gain on the trade is $45 per spread with maximum risk of $205 per spread. Return on risk is 21.95%. The short $162.50 strike price is positioned above the $161.83 all time intraday high in AAPL and provides a 1.51% upside cushion to the $160.08 closing price of AAPL stock.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.
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