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Apple's Tax-Induced Selloff Is Over


The technical test of resistance for Apple (AAPL) happened early Tuesday morning at the $570 level. Since the intraday reversal, Apple has found stability above our baseline price point of $585 and we have added to positions.

As Apple was trading in complete contradiction to the market over the past five trading sessions, it was obvious that something was happening beneath the surface. Weakness from Spain might have had something to do with it. Google (GOOG) sold off after its earnings report which may have influenced Apple.

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Gene Munster released a research report suggesting that Apple would beat on revenue and earnings but would miss on Mac units which was cause for concern. Any of those variables could have triggered the five-day selloff but the most likely reason is that broad-based income tax selling has grown to an all-time high this year.

How many investors have been forced to sell Apple in the last week in order to pay taxes? As Apple evolves into its own asset class, macro variables such as the April 15 income tax deadline will influence the stock in new ways. Last year, Apple dropped 9.6% from $351 on April 1 to a low of $320 the Monday after the 15th. This year, Apple dropped 12% from $644 on April 10 to $571 on April 17. This is definitely something we should watch out for next year.

The timing of today's bounce is validation of our tax thesis as the primary reason for the recent selloff. Everyone has been trying to come up with creative reasons for the selloff but the actual reason is systematic. We will continue to add to positions as the stock movement rewards us.

Monitoring the action into today's close is a very important indicator that will signal what kind of run we might have during the remaining pre-earnings period. With Apple still $50 off its high, the next five trading days are capable of producing excellent gains.

In 2011, Apple was able to rally after the tax selling subsided. Apple rallied from $320 to $342 on April 20 before earnings. It jumped to $355 the day after the report. The fact that Apple has gone up at each second-quarter report for the last six years gives us conviction that this stock will experience one last rally into next Tuesday's report.

Why has Apple rallied for the past six second quarters? I believe it's because the street gives too much credit to holiday seasonality and its effect on iPhone sales. The iPhone is in a stage of daily critical mass demand and sequential quarterly declines tend to be overstated by analysts who fail to grasp this concept.

With expectations pegged at 33 million units, we are once again set up for a nice beat. To provide some context, consider that a year ago Apple sold 16.24 million iPhones in the holiday quarter and followed it up with 18.65 million units in the March quarter. Any number above and beyond 37 million would be cheered by Wall Street. With lowered expectations for the Mac, and expectations for sequential decline in iPad and iPhone, the setup for earnings is favorable.

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