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The Case Against Apple


Utilizing both fundamental and technical analysis, I see potential for some bad apples.

Editor's Note: To read more of Reid's content, visit the RLH Volatility Model.

The last thing I'd ever want to do is give Steve Jobs a hard time. Heck, the guy's had a liver transplant. He's also worth tens of billions of dollars and could crush me like a bug.

Apple (AAPL) is a gigantically important company whose magnitude cannot be overstated. It represents, in terms of its placement in the American economy, what the United States used to have in practically everything, and what the United States still has in certain things: overarching dominance (in Apple's case, being first and best in the market with all things cool, technologically speaking).

This is important to think about because many people are worried about US leadership in the world economy, while at the same time Apple continues to dazzle the entire globe with success after success in both new products and updated versions of existing products.

I was joking with somebody the other day about the recently released iPad, acknowledging that I'd just read about half a dozen reviews. Nobody seemed to know what the thing does, I mused, but they all agree it's got great battery life. That being said, the iPad ticked off some 450,000 or so units in sales in less than a week.

This is what Apple has been doing for some time -- and it reminds me of 1970, when Apollo XIII blasted off and, as the film starring Tom Hanks makes dramatic note of, TV audiences and networks didn't take much notice of until the mission went awry. At that point, hard to believe, the American public had grown blasé over the incredible capability of putting people on the moon, despite what that huge capability reflected about America -- from its vast wealth to its technologies to our ubiquitous capability even then to tune into events in real time in aerial-broadcast color.

Apple's stock is hitting all-time highs, and its market cap is surpassing or is poised to surpass the most venerable companies on the planet. Retirement accounts are loaded with it and the company's customers may be the most dedicated fans ever known, including Red Sox Nation. Daring to criticize either Apple products or the shares is a reliable way to start a heated discussion and garner furrowed brows, scowls, arched eyebrows, cross words, and, I'd imagine, a few black eyes here and there. Some subjects don't lend themselves well to objective conversation in many quarters, and that's all true about Apple.

Meanwhile, the stock goes up, up, and up. Fundamentally, the company has earned consistently high praise over most of the decade of the new millennium. Of late, many analysts who hadn't already accorded a maximum view of the company have done so. The few remaining who aren't already on the pin of the positive-opinion gauge have notched up. And in both of those camps, there have been upward revisions in price targets. Some of these are in excess of $300. Technically, as well, the stock appears to be strong by various measures.

On the Other Hand…

There's always that other hand, and the rest of this piece is dedicated to exploring that subject.

I should interject at this juncture that I've never understood why there's such an acrimonious division between fundamental and technical analysis.

Fundamental analysis avers that stock prices both individually and market-wide are a function of factors having to do with business economics and individual companies' corresponding strategies, such as customer market size and penetration, growth rates, costs, profitability, and sales plans. "Softer" (i.e., not so quantitative) factors such as "management quality" are also heavily weighted and obviously therefore more judgmental.

Technical analysis takes an entirely different view -- at least it seems that way at first blush. This point of view looks at stocks and stock markets like tomatoes and the grocery stores in which they're inventoried and sold. You don't need to know about tomatoes or the tomato business as such, just know instead everything about the demand for tomatoes and the supply of tomatoes, and you'll get an idea of the price and future indications. That's why technical analysts are consumed with everything from charts to Kondratieff wave cycles.
No positions in stocks mentioned.

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