• Down some more.  The markets continued to pull-back from recent highs – representing and defining a range top.
• Apple, Inc. (AAP $398.60) FAILED to meet Wall Street analyst’s forecasts for current earnings last night after the close.
• At SMC we transmitted an Intra-Day Alert today discussing our plan for Apple, Inc. shares.  This afternoon our stop was triggered and we are out.  See our detailed analysis and assessment below.
• Our plan with Apple, Inc. has failed.  So we are out.  On October 11th, we purchased shares anticipating an exponential run higher in final recognition of Steve Jobs’ and Apple, Inc.’s achievements and real earnings that are nothing less then spectacular.  We got some of it, but not near what we had hoped for.  We expect near term volatility and do not want to participate in that.  We cover this in DETAIL below.
• Chalk one up for Mr. Gillis = the analyst who downgraded Apple shares on Monday.
• What does the S&P 500 chart tell us.  We list some things below.
• Bank of America is busy re-defining itself.  Sure, its the most unpopular company and therefore most unpopular stock on the planet, but yesterday’s move may signify a confirmed upside change in trend.  (BAC $6.40).  By the time BAC is off everyone’s black list, the stock will no longer be in the single digits.
• Germany and France don’t know what to do next and the market doesn’t like it.  See this Bloomberg article.
• We changed our short term trend rating below to “Flat / Down”.  The market is still in a confirmed UP TREND, within this lateral consolidation.
• Subscriber-Friend “Gary” mentioned this publication in an email.  For those of you who are unfamiliar with it, you may find it very enjoyable.  Hillsdale College’s Imprimis magazine.  At the SMC we get this one in the mail and enjoy each issue.  This particular issue provides us with Mr. Vaclav Klaus’s view of Europe.
• Please click here to send us your feedback.  Let us know how we are doing – We are here to serve you. Support@Stockmarketcompanion.com

• Here is a video interview of a father and son using the Stock Market Companion successfully together – as a teaching and investing tool.
  

– Markets “At a Glance” –

(Please scroll down to the end of the report to see your favorite benchmarks – Dollar, Oil, Gold … closing prices and daily direction.)

– Market Trends –

*Summary of terms from Trader Vic II-Principles of Professional Speculation (pg. 140-141)
*_________* Represents a change in trend rating.

– Market Perspectives –

For your added perspective, we’ve included this chart of the broader market (Successful stock investors develop and start with a minds-eye view of the broader market and keep it clear) –

SMC SP-500 ETF Daily Chart

Please click on the chart to view it in a larger size.

– Today’s Highlights –

Technical Perspective –

The broader market in America is the S&P 500, representing 500 of the largest, publicly traded companies in America.  At Stock Market Companion, we use the S&P500 as our “road map” for the market, and publish a graphical picture of this road map using the S&P 500 ETF (Ticker: SPY) in each SMC 15Minute Market Update that we publish – in the above Market Perspectives section. In answer to an insightful question from a subscriber-friend a few weeks ago, we explained that we use the SPY because it gives us an accurate picture of volume that we do not have with our regular chart of the S&P 500 index. When you “right-click” on the chart, your browser should open a separate browser tab and display a large picture of this chart for you to see clearly what is happening with the market.  On it, you can see –

• Our comments in boxes
• Today’s close
• Key support and resistance lines
• Volume
• Key upside and downside reversal days.
• Behavior of the market at key support and resistance lines.
• “Confirmation” days (high volume follow through days that confirm the start of a new trend – whether UP or DOWN).
• Key entry areas where we have engaged the market at Stock Market Companion.
• Trends
• Lateral consolidations
• Symmetry between previous trends (slope, distance (total price) traveled in the move, previous highs and lows)
• Key moving averages (when included)
• Failed new lows
• Lower highs
• We use “candle-stick” charts – so that over time we can teach the characteristics and predictable nature of certain candle-stick indications – Hammer; Doji; …

We will teach you more about how to use this chart to your advantage.  Our SMC Quiz #3 that we posted on Saturday introduces some basic themes about the chart.

What you will see today looking at the chart is –

• The broader market has – so far – failed to break-through the current intermediate resistance line that marks the TOP of the broad lateral consolidation in which the market finds itself.  This is not a surprise.  We mentioned on Friday in the Executive Summary that the market had come pretty far, pretty fast and that “some more backing and filling” would not be out of the question.
• Within this broad lateral consolidation – marked by extreme turbulence in the markets, the market is in a confirmed up-trend.  Please see today’s notes on the chart to see what this looks like.

Fundamental Perspective

Almost each time there has been an acquisition that has taken place over the last 6 months, and including the last few weeks, the acquired companies are being purchased at very strong premiums (+60% or more) to the current market priced assigned to the stock prior to the acquisition announcement.  One of the things this tells us is that stocks – as they are priced on the overall exchanges are perhaps selling at a strong discount.

Another indicator of the perceived value in equities (stocks) currently are the number of operation level and board level officers who have purchased shares of their companies on the open market.

Earnings at companies are very strong.  Last night, Apple, Inc (AAPL $398.62) reported quarterly earnings of $7.05/share.  Looking back over the last 4 quarters, Apple, Inc. has earned (courtesy of Briefing.com) –

Now, many of you know what we are going to do next with the AAPL QUARTERLY earnings numbers that we listed above.  We are going to simply add them up to get our total earnings for the last 12 months.  In the investing world, this is called “trailing 12 months earnings” (TTM Earnings).  When we add these up, we arrive at a TTM Earnings for AAPL of 27.67.  Now, we are going to divide today’s stock price by AAPL’s TTM earnings to arrive at Apple’s current price earnings ratio, based on TTM Earnings.  $398.62/27.67 = 14.4. (Not including Apple’s approx. $40 billion in cash).

Apple, Inc. grew revenues (gross sales) by 39% this last quarter, compared to the same quarter last year.  Friends, that is strong growth.  As a rule of thumb, a company’s P/E can be equal to or somewhat greater than its year over year revenue growth and still be considered a fair value.  As you can see from these few numbers here, that at a P/E of 14.4, Apple is selling at a P/E of well less than HALF its growth rate.  OK.  That simply validates what we mentioned above = many companies are simply NOT being given their true value on the open market.  Apple is no exception – although we were hoping for an opportunity of very strong growth in the share price within the context of this negative market environment.  If a company had deep enough pockets and wanted to buy Apple, Inc., they would almost certainly have to offer a very significant premium to today’s market price of $398.62 to get someone to return their phone call from Apple headquarters.

Let’s sit back for a minute and ask ourselves why it can be that for extended periods of time companies can be listed at such a strong discount to actual earnings –

• Although we used TTM earnings to give an indication of current share value, the market is factoring in future earnings into today’s stock price.  At the onset of recessionary periods or if a recession is highly expected, then companies share prices will reflect this expectation of future DIMINISHED earnings.  The market however may be WRONG about the possibility of a near term recession.  That is what the September auto sales number and other indicators have hinted at.  Since October 4th (immediately after the September auto sales numbers) the market has been moving higher – which is telling us that market participants are adjusting to the idea that perhaps a recession is not guaranteed.
• How about this idea – Because of the severity of the recent stock market crash, market participants are simply reluctant to push the market higher.  In this idea, what we are saying is that there may be lingering fear from the last crash.  Let’s call it a “risk premium” that the market is charging.
• How else is the market supposed to respond to this entire European sovereign debt crisis, than to discount prices by the almost immeasurable uncertainty of how the financial world would initially respond to the European Monetary Union “seizing-up” – much like what our credit markets did in the U.S. in early 2009?

Let’s go back to Apple.  In yesterday’s earnings conference call, the company announced UPSIDE quarterly earnings GUIDANCE (guidance is a fancy name for forecast) for the next quarter of $9.30/share.  Now if Apple reports $9.30/share of earnings at the end of next quarter (about the middle of January 2012), that will be +45% more in earnings than Apple reported for the same quarter last year – which includes back to school and Christmas sales.  Still the stock sold off on yesterday’s earnings news because Apple, Inc. reported actual earnings of $7.05/share vs. the Wall Street expectation of $7.27/share.  Wall Street doesn’t like surprises.  At the same time, it’s important to remember that the market’s first knee-jerk move is often not the final direction that the market takes – after a few days of back and forth movement.

Deutsche Bank told their customer today that Apple, Inc. was a “buy”.

At Stock Market Companion however, we are now “out” of the stock.  We advanced our stop-loss to $398 and this afternoon that level was briefly run-through to the south by the stock.  OK.  Why did we want to give up our shares?

• We hate losing money on a profitable position.
• We don’t know if there may be a compelling case somehow that other smart phones and products are near to the market that may really compete with Apple’s powerful offering.  By the time that idea would become clear, the stock would be well south of $380 as investors sold first and looked for verification later.
• Today’s stock price action implies to us heightened volatility which may bring the price down below our entry at $394.50.  We don’t want to be upside-down on a $400 stock.
• Our plan was to engage the stock as it moved above $400/share, hopeful for an aggressive move above previous highs at $422 and then on to the $500/share range (and beyond).  (Did you know that during the financial crisis, shares of Volkswagen jumped from approx. 400 Eur. to over 1000 Eur? – This was because of some shenanigans between the Porsche Co. and VW, but it gives you an idea of how stocks can MOVE when there is momentum behind them – even at high prices.).  With Apple, we anticipated this upside surge accurately on  October 11th, getting in a bit early.  Now our defined “line in the sand” $400 has been breached to the south.  We don’t like it.  The stock closed yesterday at $422.  If Apple had reported something different the stock would be at $450 and beyond.   Our plan has for the moment failed and we are not interested in trying to see where the Apple, Inc. shares end their downward move and if the shares again then turn higher.  We will consider a re-entry in the shares above $408 to $410.  What would really frustrate us of course is if the company all of a sudden announced a 2 or 3 to 1 stock split.  The stock would then surge higher and we wouldn’t be on board.  So far there has been no such talk that we are aware of.

• The markets were AGAIN divergent today, just as yesterday revealing further weakness in the technology sector while the broader market (S&P 500) and the DOW (DJ-30) held POSITIVE.
• Research in Motion (Ticker: RIMM $27.75) reported earnings last night that were a major disappointment.  We go through the details below.  The company received 2 broker upgrades going into earnings.  The stock then lost -21.45% from yesterday’s close into today.  We go through our steps in handling our brief investment in the stock this last week – AND WHY, below.
• Crude oil continued to descend today, reflecting a drop in value of the U.S. dollar – BUT also  concern of future demand as the global economy slows down.
• The S&P 500 is finding support at its 200 day exponential moving average.  If the broader market doesn’t find strength here and begins to sink further, the next near point of support is the low it plumbed during the recent nuclear crisis in Japan.  If it fails that point, then the intermediate term trend will be DOWN.
  
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