Stock Market Selloff: Get Ready To Buy Apple

As the stock market melts down on February 25, Apple gets closer to bear market territory. History suggests that buying the Cupertino company’s stock on the dip tends to be a good idea – but here’s the catch.
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A meltdown seems to be unfolding in the markets.

As I type this sentence, in early Thursday afternoon trading, the Nasdaq is down a whopping -3.2%. The index has not suffered such losses since October of last year, when investors panicked a little days ahead of the US Presidential election.

Does the current market rout mean that now is a good time to dump Apple and run for the hills? Or is it time to take advantage of the dip and accumulate shares?

The Apple Maven uses historical data to argue that a bullish approach, following a selloff, has the better chance of paying off in the end.

History is on the side of bulls

Apple trades intraday at about $122 per share. This is a 15% pullback from the peak closing price of $143, reached on January 25. The stock is not far from bear market territory.

Overall, and given enough time, Apple shares tend to head higher. This is no surprise, since the company is a classic example of success story in Corporate America.

Therefore, logic dictates that buying Apple on weakness is a good idea, because the stock eventually recovers on the back of outstanding business fundamentals.

The chart below shows that the average one-year return of Apple shares bought during a 15%-plus correction has been almost twice as high as the returns of buying Apple above the 15% drawdown mark.

But take your time…

Having said the above, buying shares on the way down presents one major risk: no one knows how far the stock will dip before it finally rebounds.

Think of the early 1990s. Apple had been struggling with its product offerings and outdated operating system – to be clear, this is not the case nowadays. The stock began to decline in early 1992, and had corrected 15% from the peak by March of that year, not unlike today.

Was that a good time to buy shares?

In hindsight, not at all. The stock continued to dip further, bottoming 68% below the early 1992 levels! Even worse, the whole unwinding process took a painful 18 months to reach an end.

Yes, Apple is a much better company now than it was in the early 1990s. But keep in mind that corrections can be steep and long-lasting.

Therefore, if buying Apple on the dip, it might make most sense to dollar-cost average. That is, start buying shares slowly, allowing the average cost base to lower if the stock continues to decline.

Of course, this is an idea, not a suggestion or recommendation. Each investor should assess his or her risk tolerance carefully before trading shares.

Twitter speaks

I have posed the question of whether buying Apple on the dip is a good idea now. Here is what the Twitter-verse has said about it:

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(Disclaimers: 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)