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Investors Guide To Peace With Market Volatility

Sunday, August 9, 2015

by Sheila Jamison and Rich Jamison

  August 8, 2015  

Stock market volatility continued this week, driven by less-than-hoped-for corporate results without compensating strong economic reports. Some stocks that have been leading the way up took rather exaggerated nasty tumbles. The typically volatile stocks Netflix and Tesla, for instance, each fell by over 10% in a single day. Not unheard of for them. But Disney also fell over 10% intraday. Disney is not a typically volatile security. At a minimum a large move in the price one like Disney grabs your attention. In fact, it should grab the attention of every financial advisor and portfolio or investment manager.
 
More than just grab attention, moves like these can cause a great deal of discomfort. Questions we usually hear are “What does this mean for me?” and “Should I sell everything?”
 
Large moves in the market overall or in any individual security should get attention. They don’t necessarily mean you need to do, or not do, anything about them. That attention is telling us to evaluate them! The perspective we apply – or any financial advisor or investor should apply - to best answer those questions is unemotional use of cold, hard facts. Over time, this perspective becomes the habitual way to look at the market. And once that happens automatically, decision-making becomes more logical and emotional distress abates.
 
An Example
 
Let’s use Apple’s stock (AAPL), another leading company, as an example of applying this perspective. Apple suffered an appreciable recent price dip. It pulled back by 14.8% across 11 trading days from its intraday July 20th high to its August 4th intraday low. While it didn’t have a 10% single-day plunge, it did open July 22nd 8% below the prior day’s closing price.
 
Again, questions came up. Should we run from Apple? Is the stock collapsing? Are iPhones passé? Is the Apple Watch a loser?
 
Apple Has Changed
 
Life was so much simpler when Apple was a $20 billion company. "Apple Computer" wasn't even among the largest Technology companies in the US, much less the largest company in the history of civilization. Back then – when it traded for single digit prices – the company could guide lower, the stock could get cut in half in one day, and seemingly not garner much investor notice. It certainly didn’t cause the stir it did by trading down $8 a week and a half ago. We know of more than one financial advisor who knew of Apple as a computer but didn’t know or care that it had a stock before 2002 or so.
 
How Will The Market React?
 
In our business, we can never know how the market will react to earnings news. We've long encouraged our clients to build and manage their portfolios upon something other than what you think a company will say, and thus how you hope the market will interpret what the company just said. 
 
Apple posted better than expected earnings. It also handily beat its own revenue forecast of $49 billion - but it missed the Street’s revenue expectation for $51.1 billion. Would the market respond to the additional $3 billion in earnings Apple garnered over the past year, or instead, to the $0.13 billion revenue shortfall between reported revenue and what Wall Street was expecting? 
 
The revenue “shortfall” won. And Apple caused more of a stir on July 22nd than it did in back September 2000, when the stock of that $20 billion Apple dropped 50%. Back then it was about a $10 stock (unadjusted for the split, under $2 on a split-adjusted basis).
 
Did It React "Correctly?"
 
So did investors, advisors, investment and portfolio managers overreact to the recent price drop? The answer is maybe. One thing we see during volatile periods is profit taking. Certainly some of the Apple selling was due to people harvesting profits they made during Apple stock’s run-up. However, there were just as surely others who simply panicked. Thoughts like China’s slowing down, China’s the biggest market, Apple “missed” its number, its Apple watch isn’t selling, et al. took control. (Note that panic results from emotion.)
 
Would a logical evaluation rather than emotional reaction have prevented this? We’ll give you some facts and you judge.
 
The Future Is Unknowable
 
The simple truth to this is that no one knows what will happen to Apple stock. They cannot know the future until it gets to be the present. So, acknowledging right up front that the past cannot guarantee what the future will be like it, let’s resort to those cold, hard facts we mentioned above.
 
What Do We Know?
 
In Apples earnings report, we learned that Apple sold a record number of iPhones – a 41% increase over last year’s same quarter. Further, Apple’s revenue from China had doubled despite China’s slowing down. Those making you feel any better yet?
 
As to the Apple Watch trailing anticipated sales, an August 7th Bloomberg report begins with the sentence,
 
“U.S. watch sales fell the most in seven years in June, one of the first signs Apple Inc.’s watch is eroding demand for traditional timepieces.”
 
It’s not (yet) a cold, hard fact that the Apple Watch is replacing these other watch sales, but evidence pointing that way. It’s difficult to know with certainty as Apple is not releasing numbers for watch sales yet … just saying they’re exceeding expectations. The question about trailing “anticipated” sales then becomes “whose” anticipated sales? Apparently, it’s not Apple’s. Still a comforting thought though, no?
 
Technical Analysis
 
What about the technical analytics of the stock’s action? While July 22nd was the worst single session for the stock so far in 2015, it failed to produce even a monthly low, much less a 52-week low. Even after the subsequent further decline, as of yesterday’s close, it is still up 4.7% year-to-date for 2015. 
 
Despite its current price drop, AAPL remains a technically strong stock. Numerically, it has 4 out of 5 key technical attributes; the 5 we’ve found to be most vital and useful of the dozens that exist. We consider stocks with 3 or more of these 5 attributes to be in our ‘buyable’ universe. Specifically to AAPL, it’s been a 4 attribute holder since November 8, 2012. It’s done rather well since then. Feeling more at ease?
 
If we read that last paragraph, we’d be asking, what’s with the missing 5th attribute? Just in case you are wondering, that is a sell signal that short-term traders would use. Remember that as uncomfortable as we may feel with volatility, volatility is a day-trader’s heaven. Volatile periods are part of the typical market. You, we – in fact, most investors – would rather not go through them. Day-traders await them with bated breath.
 
Investing Versus Day-Trading
 
We’re not day-traders … we’re investors!  What’s important to us is that the major trend and long-term Relative Strength charts remain bullish today. In short, very little has changed with regard to the technical picture for AAPL. On a near-term (i.e., the day-trader’s) basis the stock is on a sell signal. On a long-term basis the weight of technical evidence remains clearly bullish (specifics below*). Okay, did that help you to relax a bit further?
 
History
 
Here’s another historical perspective you may find encouraging. You aren’t alone if you are among those asking the ‘is it time to dump Apple?’ question. Fact is that’s a very crowded space; so much so that CNBC has discussed it repeatedly since the drop and right up to (and including) yesterday. They also provided the fact that the last 7 Apple stock price pullbacks were similar to the current one (14% - 16% dips). In 6 of those 7 dips, the stock rebounded ~30% off the low over the next 90 days. On average, that left the stock just shy of 12% above where it was before the dip began! Maybe that adds to your comfort level just a bit more.
 
Yes, that’s history – not a guarantee of anything to come. Will that happen this time? As we noted, nobody can know. 
Over the last 3 days in a tough market it has picked up 1.7% of the 14.8% dip (and is up 4.7% YTD as of the August 7th closing price). Looks promising so far … still a 1.7% climb over 3 days is much too little change and too short a time to draw any conclusions. 
 
Let’s look at one last set of historical data. Going back 30 years and counting the current stock price status, there have 31 times AAPL has been this far on the oversold side of its 10-week trading band.** How did the prior 30 times turn out? Since the first such event (took place in 1987), after such an oversold event on average:
 
  • 30-day returns have been negative (-3.9%)
  • 90-day returns have been negative (-1.4%)
  • 120-day returns have been positive (+3.4%)
The data above include many points while Apple was still the old Apple Computer company with the stock selling for less than $2 on a split-adjusted basis. Though Apple was making inroads in music, those were pre-iPad and pre-iPhone days. At such prices, percentages are misleading. The above data is not restricted to Apple as the giant it is today.
 
So let’s look at the oversold points beginning with those when the stock was at a split-adjusted price above $10 (>$70 then). There are 9 occasions prior to the current one (the first was in 2008) when AAPL experienced this degree of “oversold-ness” to evaluate. How did AAPL fare in these 9 occasions? On average for the “modern day” AAPL:
 
  • 30-day returns have been negative (-0.9%)
  • 90-day returns have been positive (+5.8%)
  • 120-day returns have been positive (+6.8%)
Some Caveats
 
  • The illustration is to demonstrate the way we evaluate all investments – without emotion. It is neither a recommendation to buy or sell any security. Apple is used for the example because it’s in the news so much of the time and has been one of the dominant headlines since it reported earnings.
  • Similar analysis can be done for Netflix, Disney, Tesla … basically any security. Just what specific details an investor, advisor or portfolio manager would examine will usually change from one security to another. It’s the principle that remains the same – do it without emotion.
  • And the big one! Everything we find is as of the time we examine the data. Anything can change. Conclusions may change – usually will change – with changing conditions and situations. What’s “right” for today may be equally as “wrong” for tomorrow … and vice versa. As things change, so do conclusions. It’s okay to be wrong. It’s not okay to stay wrong!
 
We’re sure the “remove the emotion” approach makes intuitive sense to you. Internalizing it so that it becomes your automatic reaction to volatility may take a little more work and repetition. That’s part of why we’re here. If you have any ideas, comments or questions, please feel free to contact us with them. And please feel free to pass this article along to anyone you know who could benefit from the information.
 
* For those who enjoy the technical details, Apple Inc. broke a double bottom at $118.00 on 8/3/15. Our computers sector Bullish Percent chart is in Bear Confirmed status at 34 % in a column of O's. AAPL is in a positive trend as it is trading above its bullish support line. The Relative Strength against the market is on a buy signal and the RS chart is in a column of X's. The weekly momentum, an indication of short term strength or weakness, turned negative on 5/29/15. The simple moving averages show the stock trading below its 200 day moving average and below its 50 day moving average. The relationship between the 50 day and the 200 day moving average shows the 50 day moving average above the 200 day. AAPL is trading -78.45% on the oversold side of the ten week trading band, the middle of this trading band is $125.86. The 30 day trading volume average is 51,113,554 shares.
 
** While at first blush this looks like somewhat of an annual event, in reality many of those oversold events have come in close proximity to one another with as much as 6 years in between clusters. In late 2012 the stock had three "events" in oversold territory, and fall of 2008 was similar. So in reality there have been just 15 real periods in which AAPL has been this oversold.
 
References:
Apple Helps Push U.S. Watch Sales to Biggest Drop in Seven Years.  Thomas Mulier. BloombergBusiness (Bloomberg.com). August 7, 2015.
Closing Bell, Halftime Report, Power Lunch and Squawk on the Street. Hosts and contributors. CNBC TV. July 22–August 7, 2015. 
Daily Equity and Market Report. Staff. Dorseywright.com. July 22, 2015.
Weekly DALI and Equity Overview. Staff. Dorseywright.com. August 5, 2015.
 

The data above were taken from sources deemed reliable. However no guarantee can be made as to their completeness and accuracy.
Interpretations of the data, views and/or opinions expressed are those of the Jamison Financial Group based on market and economic conditions as of the date of publication and are subject to change. They do not necessarily reflect the opinions of any other individual, group or organization.
Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities whenever mentioned are for illustrative purposes only and may not be relied upon as investment advice.
All indices are unmanaged and are not illustrative of any particular investment. A direct investment cannot be made in any index.
The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.
The NASDAQ Composite is a market-weighted index of all the over-the-counter common stocks traded on the NASDAQ system.
The S&P 500® is a market-capitalization-weighted index of common stocks.
Tax and/or legal information contained herein is general in nature and for informational purposes only. It should not be relied upon as advice. Consult your tax professional or attorney regarding your unique situation.
Past performance is no guarantee of future results.
 
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