Despite having been one of the top-performing stocks in the first half of the year, shares of Apple Inc (NASDAQ: AAPL) have found themselves under considerable pressure since hitting an all-time high in July. They’re down about 15% since then, and what’s worse is that it’s been a measured decline.
It would have been different if perhaps they’d simply traded sideways into August and then suffered a couple of steep drops in the weeks since then. However, the uptrend that started in January and that sent shares up 60% has been well and truly broken for now at least.
In its place is what could easily be the start of a nasty-looking downtrend, with a series of lower highs and lower lows surely causing Apple’s investors some sleepless nights. But all is not lost, however, and with the tech giant slated to release its fiscal Q4 earnings after the market closes this Thursday, it’s an interesting time to be weighing up the opportunity.
Geopolitical tensions
One of the key headwinds that has been weighing on shares is the rise in geopolitical tensions between the U.S. and China. China is Apple’s second biggest market, so any sign of fresh future weakness in the country’s demand for Apple’s products is going to be a major cause of concern.
The bad news is that tensions between the world’s two biggest economies are at best, “fragile” right now. So said the team at Blackrock last week when they named the strategic competition between the U.S. and China as the biggest geopolitical risk facing markets right now.
Recent headlines from the two governments haven’t made for pretty reading either. The Biden administration tightened controls on the sale of AI chips to China earlier this month, which led to a counter-move from the Chinese that curbed their graphite exports. Graphite is a key requirement for electric vehicle manufacturing, and China has been responsible for up to 80% of global production in recent years. In this context, it’s no wonder that Apple’s shares have been trading softly and could continue to do so if tensions increase.
Attractive risk/reward
But at the same time, there are reasons to think the risk/reward setup here is becoming quite attractive. First and foremost, Apple’s Relative Strength Index (RSI), a measure of how overbought or oversold a stock is, is indicating extremely oversold conditions right now. It feels like the market has been pricing in the worst-case scenario, but being on the short side of Apple when they’re reporting earnings is a dangerous place to be.
The company has beaten analyst expectations on the headline numbers for seven of the past eight quarters, and an upside surprise on Thursday would go a long way to getting the stock trending upwards again. If you’re an optimist and feel that the worst outcomes of any continued geopolitical tensions will not come to pass, then you have to be bullish on Apple in the long run.
The company is going big on artificial intelligence, with reports last week pointing to a planned $1 billion investment into generative AI development. September’s new product launch was also well received by analysts. The team at Monness, Crespi, Hardt reiterated their Buy rating on Apple shares last week, alongside their price target of $208.
From where shares closed on Friday, this points to an upside of more than 20%. Furthermore, were Apple shares to hit this in the coming weeks, they’d be back at fresh all-time highs. It’s a strong stance to be taking the week before a major earnings update, but their history supports the likelihood of an upside surprise.
On that basis, with the technical factors also underpinning a long position, the risk/reward profile is quite attractive right now. Investors must, of course, watch for any disappointment or miss on the headline numbers as this could quickly reenergize the bears and send the stock down to fresh lows.
To offset that, it would be prudent to work some stops below last week’s low of $165. On the upside, however, if shares can get up towards $180, then there’s every reason to think the longer-term uptrend is reinstated.
