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Citigroup Downgrades Apple, but Does It Matter?


Price series is the only thing that matters when putting your money on the line.


It was a busy weekend for Apple (NASDAQ:AAPL), which saw three catalysts.

The third largest bank took down its numbers on Apple. Citigroup's trio of Apple analysts, Glen Yeung, Walter Pritchard, and Jim Suva, cut Apple's price target to $575, and rated it Neutral, down from Buy. The irony is that Citi downgraded the name on weaker demand as the company reported stronger-than-expected iPhone sales out of China, topping 2 million units.

On Friday, December 14 -- which seems like an eternity ago now -- Apple was cut by both UBS and Macquarie. Daniel Chang of Macquarie lowered his iPhone sales estimate for the January-March quarter to 44 million units from 48 million and cut his predictions for the following three months to 26 million from 28 million units. According to Chang, Apple's "less innovative and differentiated functionality" will contribute to the slowing of iPhone market growth.

Finally, Morgan Stanley was out with a note saying demand for the iPhone is still strong and the company could sell more than 50 million this quarter.

Some investors and traders might argue that these analysts are late in their call. That is certainly a possibility since we believe price leads fundamentals, and this information has been priced into the stock since it slid close to 27% from its highs. This is why you don't see many sell-side analysts becoming great buy-side traders. What we (or anyone else) believe is irrelevant, however; price series is the only thing that matters when putting your money on the line, and our algorithm only looks at price series.

We are not day traders; we look to exploit intermediate trends that result in 10% to 20% returns. Most of the news that we have seen lately with Apple can easily whipsaw the best traders. For 2012, we put on three trades in Apple which resulted in 47% gains. There is no correct strategy as long as you are making money. Last week we reiterated that we need a catalyst to get long the name (see Wait for Catalyst to Get Back Into Apple, and a 'Strong Buy' Signal to Add to Google). Getting a warm and fuzzy feeling on valuation, or hoping the selling stops and picking a level of strong support are not the best strategies. We are waiting for two catalysts to get long this stock, and if we never get them, then we will not be buying Apple. (Reminder: Either a move back to a Hold from a Strong Sell, or an outright Oversold level from Approaching Oversold level would make us initiate a long position.

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No positions in stocks mentioned.
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