Sectors To Watch: Apple (AAPL) Is The Key To Technology Stocks Next Move

| April 23, 2012 | 0 Comments

Tech stocks had a big rally to start the year.  But after a rough week, investors are wondering what the sector next move will be.

In the first quarter, the Technology Select Sector SPDR (XLK) tacked on an eye-popping 20% gain.  The sectors big move higher was paced by a 56% increase in Apple’s (AAPL) stock price.

Obviously, Apple was leading the entire sector higher in the first quarter.

However, since peaking at the end of the first quarter XLK has dropped 5%.  And once again the move is being led Apple.  The tech giant’s stock has lost about 10% of its value since it peaked earlier this month.

Here’s the thing…

Last week, other tech stocks like eBay (EBAY) and Microsoft (MSFT) reported great first quarter earnings. EBAY shot up 13% and MSFT tacked on 6% after they reported.  Despite their strong quarters, tech stocks continued to falter.

No doubt about it, at this point the tech sector rises and falls with AAPL.

Here’s the problem…

Apple reports their first quarter results later this week.  The sectors fate in the near term depends on how they do.

Here’s the kicker…

Even though AAPL’s stock has been falling, analysts are getting more bullish on the stock.

Get this…

During the same time AAPL has fallen 10%, analysts have increased their first quarter earnings estimates from $9.80 per share to $9.96.

Simply put, that’s bad news for AAPL.

Apple needs to beat analysts’ earnings estimates in order for the stock to rally.  But the higher analysts ratchet up their estimates, the harder it is to beat them.

At this point, it’s becoming more unlikely that the tech giant will be able to beat the ever increasing expectations.  And that’s trouble for the entire tech sector.

What’s more, AAPL no longer trades at a discount to the market.

Over the last few years, you could buy AAPL at a price to earnings (PE) lower than the S&P 500.  But right now AAPL trades at a PE of 16.7x while the S&P 500 trades at 14.2x earnings.

In other words, AAPL is now trading at premium to the market.

Here’s the bottom line… 

Apple’s stock has gotten expensive.  If they fall short of analysts’ expectations, we could see the selloff accelerate to the downside.  And the entire tech sector will likely will fall as well.

One way to speculate on a short term selloff in tech is buying puts on XLK.  You can buy XLF May 2012 $29 Puts for about 59 cents.


Good Investing,

Corey Williams

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Category: Sectors To Watch

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.