From Barron's' "Dow Set to Fall, U.S. Political Pressures Weigh" posted early Monday:
The stock market was under pressure Monday as a host of issues including U.S. political friction and a global energy crunch damped investor sentiment, while a trading halt on Evergrande shares made waves in Hong Kong.
Futures for the Dow Jones Industrial Average indicated an open 80 points lower, after the index rose 482 points Friday to close at 34,326. Futures for the S&P 500 and Nasdaq indicated a similar start to the trading week.
A familiar set of themes weighed on investor sentiment Monday. Analysts noted that the U.S. debt ceiling deadline in December and continuing political conflict over the $1 trillion infrastructure bill and $3.5 trillion reconciliation package muddied the waters.
“Inflation, the energy crisis, supply-chain issues, economic growth stuttering, concern that interest rates could go up sooner rather than later and China’s ongoing Evergrande debt problem remain at the forefront, clouding investment decisions and muddying the waters for anyone trying to make money on the market,” said Russ Mould, an analyst at broker AJ Bell.
My take: Yahoo!Finance sees a bearish Double Moving Average Crossover pattern. Max pain is 145.
NOTE: The current owner of Maximum-Pain.com responded to my queries about how their data are collected...
My charts are updated real time, but the data comes from TD Ameritrade APIs. They don’t update all their data real time. For example option volume is updated real time. But open interest is only updated once per day. They don’t share the exact time in the API documentation. It seems to be overnight. The open interest is updated by 6 am EST.
What I found wasn’t consistent enough to act on. Then, just like today, volatility made max pain a none issue.
I also found that backing off a Strike, or two, from high Open Interest was more accurate, with less work. This all led me to exclusively track intraday lows, after all, everything else is higher. From that I started buying VCSs about a dollar below Monday’s intraday low. That strategy works great, except (like above) during periods of high volatility.
When the current macro turbulence subsides, investors will return to AAPL because it’s an underpriced growth stock, especially at current prices.
Although we both agree about the cause of the current drop, I’m not sure I agree with your conclusion… I don’t know if AAPL is underpriced at current prices or if investors will return. With today’s drop, AAPL is at a 27 PE valuation, which isn’t low compared to recent history. In a higher interest rate environment, the PE was sub 20. Does the stock stabilizes at a 25 PE or a low 20s PE? Even with great Apple EPS growth, a low 20s PE would keep the stock below current levels. For example, if Apple grows earnings to $6.50 per share (from today’s $5.11), a 21 PE would put the price at 136.50.
That’s a great insight, but it’s not news here. Apple has been literally shrinking its P/E ratio for a year now – and the price has hit All Time Highs even so.
You need to disconnect the stock price (valuation) from the earnings ratio (value) with Apple to see clearly what’s going on.
Apple will be seeing new ATH’s because of the impact of its massively increasing EPS. The fact that a massively growing EPS wants to shrink the P/E just as massively is unimportant over the long run.
And remember: Lower prices are taken advantage of by Apple’s massive cash flow via equally massive buybacks, which inevitably serve to shrink the number of pie slices remaining even as the pie itself gets bigger.
Not too long ago, the PE was 12. 12!! Even with great EPS growth rate from increased profits and buybacks, a PE that low would crater the stock another 50% from here before it recovers. I’m not saying it will happen, just that it’s possible. And there’s no guarantee we ever go back up to a 30+ PE ratio again, if that increased valuation was a result of historically low rates and easy money from the Fed.
As a result, I know just how fake those old P/E valuations were, just as I know what has propelled AAPL far above those levels presently. I reiterate what I said: The undeniable fact is that Apple is killing it when it comes to improving real share value. Just killing it. And also that the valuation inevitably follows real share value, whether it’s measured in earnings or revenue.
AAPL is acting exactly like it would if it were just one of a basket of tech stocks. That’s why it’s been tracking the S&P 500 so closely over the last year.
But.
If you really look at what’s in that basket, Apple is a far better value than most. So how smart of Apple is it to take the avalanche of cash that comes in and convert it into less shares issued? And how much more positive is that process when the valuation those shares are given is dragged down by the true value of the other “eggs” in the basket?
THAT’S why holding AAPL long is a win-win, and why corrections (like the present one) are actually a plus for Apple longs.
“It’s a market freak out about interest rates…”
To some degree, yes. But it’s being exacerbated by the food fight in Washington over the debt limit. Lack of predictability is anathema to the market, especially when the economy’s stability is being actively threatened, even if it’s just political grandstanding.
I know that Alphabet and Microsoft in particular have gotten into large stock buybacks. I also know Apple often does ASR’s during it’s buyback blackout period. I have no idea if other companies do the same.