It's been one of the greatest longs in the history of investing, but it looks as if the run in Apple could be finished for now.
The last two months of selling seem very different from other pullbacks in this stock, which has been rallying since its iPod MP3 player took the world by storm in 2003. It's been steady and unrelenting, like water being drained from a tank.
My view is simple: Major institutional investors are now unwinding long-term positions initiated years ago. They're probably long from $200 or less and are happy to get anything more than $500.
As the technicians would say, AAPL is going into "distribution." I expect bounces to be short-lived and met with selling. Good news will be ignored and bad news will be expected. Valuations will look alluringly cheap but are more likely to be a value trap than a real buying opportunity.
The main reason I am so bearish is that AAPL so quickly fell through its 100- and 200-day moving averages in the last month. Those levels had provided support at various times since early 2010 as the stock ascended from about $200 to over $700. They've now been essentially erased.
The second reason is that the charts have been showing so-called bearish divergence, with the MACD indicator falling as shares pushed higher in recent months. This suggests that momentum is slowing. It also came at the same time that the stock failed to hold the key $700 level, a so-called "false breakout." These two events at the same time don't augur well for the bulls.
Another reason is found in my column from July, when I recommended the stock based on it consolidating above a key trend line. If you now extend that line, it points below $500. By the time it's reached, it could be much lower.
The last reason is that the fundamental story has been weakening. The last two earnings reports were mediocre, with weak guidance. The company's suite of products has also been gaining market share much more slowly than Google's Android devices, and its magic hasn't been working in China. AAPL still has plenty of fans in the United States and Europe, but after almost a decade of rehashed iPods, iPhones and iPads, how much more growth does the story have?
So my belief is that AAPL may bounce from here or could keep dropping. If it rallies back to the $585 area, I think it's a short. I believe that it could go as low as about $420 to $440 in the next year. That was resistance in late 2011, and then it leapt from there in January. The gap could very well be the destination of the current move. My prediction would be invalidated if AAPL closes above $600 for more than a week.
There are two other names that could also head lower: Lockheed Martin (LMT) and Raytheon (RTN). Both are near recent high levels and face weaker business in coming years as Congress scales back spending. LMT had bearish put buying yesterday, in fact.
One company to consider from the long side is Legg Mason (LM), a mutual-fund operator that's been bleeding assets for the last decade. Management reported an inflow last month, and the stock has been quietly working its way higher for the last month despite weakness in the broader market and the financial sector. Call buyers were active in LM on Monday.
(A version of this article appeared in optionMONSTER's What's the Trade? newsletter of Nov. 14. Chart courtesy of tradeMONSTER .)
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