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The equity markets have struggled since last Thursday. The main concern is the Federal Reserve decision that’s coming today. From high to low, the S&P 500 lost 10% in four sessions. Great companies like Apple (NASDAQ:AAPL) stock suffered even more. Today my message is about cautious optimism. I like the outlook that AAPL stock has, but I fear the temporary risk it could pose to the markets.
There is absolutely nothing wrong with Apple from a fundamental perspective. The company still sells out of every gadget it makes, and at a premium price. Moreover, its customers love them, so they don’t mind paying extra. Financially, Apple is as strong as they get. But despite all of that positivity, there’s still possible reason for concern.
Here’s a closer look at what investors might expect from AAPL stock in the coming days.
| Ticker | Company | Current Price |
| AAPL | Apple | $134 |
AAPL Stock’s Potential Red Flag
Source: Charts by TrendSpider
The company’s strength is actually raising a bit of a red flag. After this correction, the S&P came within 9% of its pre-pandemic crash site. Remember that back then, that was an all-time high. AAPL stock, on the other hand, is still 38% above its same watermark. That is an unusual discrepancy that will likely need to normalize.
On its own, I don’t worry about the stock falling apart. But it could correct if the trigger is external. Stocks don’t trade in a vacuum, so any global event can set them off. A similar risk also lies in Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). These companies are also two giants that are too far above their pre-pandemic highs.
I am not picking on the big ones, because Amazon (NASDAQ:AMZN) was already 8% below its February 2020 highs today. Salesforce (NYSE:CRM) is even worse — down 16%. There are more big companies like this. In fact, the iShares Russell 2000 ETF (NYSEARCA:IWM) closed the distance too. (That’s a basket of 2,000 stocks).
Therefore, the message here is that we could have two scenarios. The first is positive, which suggests that Apple is correct at holding its ground. If that’s the case, then the market will follow it higher, and the bottom is near for this correction. The second is bearish because it suggests that AAPL stock will fall 20% to match the markets. MSFT and GOOGL will follow too, and take the S&P the rest of the way (down 10%).
Investing in Apple Today
My gut says that the first scenario is more likely than second. Therefore, you can count me on the bullish side. An important part of being successful with the stock market is to see the potential potholes. Planning for the worst case doesn’t mean I’m rooting for it. Often the biggest losses come from blind sides, where investors didn’t look around for all possible scenarios. As such, consider this a mild warning about the worst case scenario that not many people are discussing.
Today the Federal Reserve tells us their next moves on policy monetary policy. They will move the markets and the outcome is a coin flip. It is possible that they will continue to raise rates, even if it breaks the economy. Meanwhile, their rhetoric so far has been enough to have caused a recession on Wall Street. If they continue to be this combative, I guess they can break it completely.
A green shoot comes from the fact that most experts have already laid out the doom scenarios. When everyone is watching the road, we are less likely to crash. What Apple stock investors do from here depends on their time frame.
Those who were looking to engage with new positions should only take partial ones to start. Meanwhile, waiting out the overall market jitters seems like a reasonable course of action for the rest. Options traders have dozens of ways they can trade with more confidence. They are worth investigating, so let that’s another tactic to consider.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
