Apple Stock Is Ripe For A Rally. Here’s Why.

Apple stock has been in a drawdown for nearly three months, but the Apple Maven believes that a rally back to all-time highs is imminent. Here are three key reasons.
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Apple stock  (AAPL) - Get Report continues to trade around $125 apiece, and a charge back to late January all-time highs has failed to materialize. Investors who got used to seeing the value of their Apple positions rise by well over 50% in 2019 and 2020 must be anxious for the next leg higher.

The Apple Maven believes that a rally off current levels could be imminent. Below are three reasons to support optimism on AAPL shares over the next few weeks or months.

Figure 1: Apple Park aerial view.

Figure 1: Apple Park aerial view.

Yields have stabilized

One of the most significant market movers as of late, especially for growth stocks, has been yields. Medium- and long-term interest rates have moved higher in the past year, more so earlier in 2021, largely due to expectations for reheated economic activity leading to higher inflation.

Think of mid-May, when the 10-year treasury yield returned to its 52-week high. At that point, Apple stock sold off sharply and returned to August 2020 levels. Worth highlighting, nothing appeared particularly wrong with the company’s fundamentals, and the only bearish company-specific development seemed to be the legal battle with Epic Games threatening the App Store.

Now, yields have stabilized (see chart below, in green). The 10-year rate breached 1.7% in March, just as AAPL shares approached their 2021 lows. Since then, yields have come down about 15 basis points, and the five-year forward implied inflation seems to have plateaued at a 10-plus-year high of 2.7%.

Figure 2: AAPL vs. TNX chart.

Figure 2: AAPL vs. TNX chart.

As the saying goes, lack of bad news can be good news. With yields and inflation having found a point of stability, a major macroeconomic threat to Apple stock seems to have gone dormant, which could be constructive for the Cupertino company’s share price.

Drawdowns have not lasted very long

The value of Apple stock, just like any other risk asset, tends to fluctuate. Sometimes, these movements lead to sharp drawdowns – i.e. a decline from a peak. AAPL is currently more than 12% below its all-time high, and shares have not reclaimed the top in 88 days and counting.

In the past decade, Apple stock stayed in a drawdown for as long as 450 days. Therefore, the current decline is not unusual by historical standards. However, this will be the first time since the Great Recession that AAPL will remain under water for longer than three months without a substantially bearish business fundamental reason.

Below are the three instances in which Apple stock remained stuck in the mud longer than it currently has, over the past decade. Notice that, in all cases, Apple was in a much more fragile position than it is today:

  • Late 2012 to mid-2014: during the first post-Steve Jobs years, Apple struggled to follow through on the success of the iPad and to draw much demand for its iPhone models 4S and 5. Things only took a turn for the better with the introduction of its most successful ever iPhone 6.
  • Mid-2015 to early 2017: the mid-2010s marked a period during which Apple severely underperformed in one key growth market: China. The product portfolio did not seem to line up well with demand in the country, and Apple’s financial results consistently disappointed.
  • Late 2018 through 2019: China and the iPhone, once again, did not gel. Some of the headwinds could be attributed to the heated 2018 US-China trade war.

If one were to assume that Apple is a strong company, with enticing growth opportunities and a solid balance sheet (check, check and check), it would be reasonable to expect that its stock will eventually recover. It has not for a bit too long, in my opinion, and the rebound may be overdue.

Summers have been good for Apple stock

The months of July and August have been particularly good for Apple stock in the past 10 years. To be clear, past performance is not a guarantee of future results. But in this case, there could be a good reason why AAPL has a better chance of thriving in the summer months.

The market is thought to be a discounting mechanism: it assesses business or economic fundamentals several months into the future, and bids stocks up or down today. For Apple, the big events of the year tend to be (1) the launch of the iPhone in September and (2) the holiday shopping season in Q4.

Figure 3: Avg. monthly return vs. S&P 500 (seasonality).

Figure 3: Avg. monthly return vs. S&P 500 (seasonality).

It is reasonable to expect (even if not at all certain) that Apple stock could find its footing in the next couple of months. Any sell-the-news pressure ahead of what will likely be another strong holiday shopping season in 2021 will probably not materialize until September or later.

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What do you think will most likely happen to AAPL share price in the next few weeks and months? Leave your opinion below.

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)