Apple’s 4-Week Performance Post-Earnings

In our 10-Chapter Fiscal Q3 Earnings Compendium published ahead of Apple’s Fiscal Q3 results we made a strong case arguing that Apple would gap-up above $390 the day after earnings (see July 19, 2011 commentary), set the high of the day immediately after the opening bell, and that the stock would undergo a correction over the subsequent four-week period after gapping-up the day following its results. For those who weren’t here when we put this together, take a look now. It’s still very much relevant

The Fiscal Q3 Earnings Compendium
1. Chapter 1: Fiscal Q3 Earnings Estimates: June 20, 2011
2. Chapter 2: Understanding Option Premiums Ahead of Earnings Part 1: July 13, 2011
3. Chapter 3: Understanding Option Premiums Ahead of Earnings Part 2: July 14, 2011
4. Chapter 4: Here’s how the stock will react on earnings Part 1: July 17, 2011
5. Chapter 5: Here’s how the stock will react on earnings Part 2: July 18, 2011
6. Chapter 6: How to position ahead of earnings Part 1: July 18, 2011
7. Chapter 7: How to position ahead of earnings Part 2: July 18, 2011
8. Chapter 8: Hedge at the Open: July 19, 2011
9. Chapter 9: Why Apple’s Going to $400 after earnings: July 20, 2011
10. Chapter 10: A lesson in why Call-Spreads & Hedging are far Superior to Selling: July 26, 2011

In this 10-Chapter Compendium, we laid out a case demonstrating that Apple tends to trade down in the days and weeks following an initial positive reaction to its earnings results. The evidence clearly showed that in five out of the last six quarters, Apple’s stock was down 1-month from the closing price ahead of its earnings results.

This indicated that those who didn’t play earnings at all, didn’t seem to be all that worse off than those who did. History has clearly shown that there would be a second opportunity to buy the stock under the closing price ahead of its results (this quarter included).

Yet, we also showed that despite the fact that Apple trades down sometime during the 4-week period from the closing price ahead of its results, that the stock almost always also gaps-up higher during the following trading session after its report. In fact, the evidence showed that in 8 out of the last 9 quarters (88.9% of the time) after the financial crisis, Apple has gapped up significantly higher the day after its earnings results — 89% chance of a gap-up based on the history!!!!

This clearly indicated that investors who decided to play earnings were almost always far better off than those who didn’t play Apple’s earnings. Especially if those investors took precautionary measures immediately after Apple’s results by either reducing their risk exposure or employing a clear hedging strategy with the use of legged-into call-spreads ahead of the ensuing 4-week period.

We even got into the question of “when?” While we know that Apple tends to gap-up after its earnings results and that it tends to sell-off back down to its pre-eanrings closing-price, we also needed to know “when” would be the best time to reduce risk after earnings.

The answer to that question was also shown in the data, and the evidence clearly demonstrated that the best time to reduce risk was in the opening minutes on the day after Apple reported its results. In fact, the evidence showed that in 6 out of the last 8 quarters, the high of the day was set right at the opening bell.

Even more impressive, in the 6 out of the last 6 cases where Apple gapped-up significantly, the stock set the high of the day 100% of the time right at the opening bell. If you include this quarter, you can now make that 7 out of 7 cases.

Yet, the one thing we didn’t answer in the 10-chapter compendium was how the stock tends to perform over the next 4-week period from the open. For those who took precautionary measures by either reducing their risk exposure or through the use hedging strategies vis-a-vis call-spreads, how did these investors tend to do over the course of the next 4-week period? If Apple follows the same general trend we’ve seen over the past 6-quarters, where will the stock be 1-week, 2-weeks, 3-weeks and 4-weeks from its opening price on Wednesday, July 20 at $396.12 a share?

So we took up this issue in a general review of how Apple tends to perform after earnings in the article entitled, “The Details of Apple’s Performance Post-Earnings.” Following this article, we also published a review each week after Apple’s earnings detailing how the stock has traded, whether it traded with the trend and what the trend seems to say will be the case in the following weeks.

You can find the Week 1, Week 2 and Week 3 review by clicking on the links. We’ve also organized the material in the links below in this 5-chapter series on “Mastering Apple’s Performance Post-Eranings.” Soon we’ll be cataloging articles in a more organized fashion into a series. This article is chapter 5 of the performance series:

Mastering Apple’s Performance Post-Earnings
1. Chapter 1: The Details of Apple’s Performance Post-Earnings: July 24, 2011
2. Chapter 2: Apple’s 1-Week Performance Post-Earnings: July 27, 2011
3. Chapter 3: Apple’s 2-Week Performance Post-Earnings: August 4, 2011
4. Chapter 4: Apple’s 3-Week Performance Post-Earnings: August 10, 2011
5. Chapter 5. Apple’s 4-Week Performance Post-Earnings: August 17, 2011

Week-4 Performance
Now lets finish this series by taking a look at how Apple closed exactly 4-weeks from its opening price post-earnings. The opening-price “post-earnings” is the price that Apple opened at the day following the release of its results. The opening price post earnings was on Wednesday, July 20, 2011, and Apple opened the day at $396.12.

Today marks exactly 4-weeks after Apple’s opening price post-earnings. As we demonstrated in the historical data, Apple was down at least 4% four-weeks after its opening price post-earnings in 5 out of the last 6 quarters (83.3%). This quarter was no different.

Apple closed the session today at $380.44 which is down by exactly 3.96% or $15.68 lower than its opening price post-earnings 4-weeks later. As you can see from the chart below, Apple has traded almost exactly with the historical trend over the past four week period. In fact, if you look at the previous 5 times where Apple was down 4-weeks from its opening price post-earnings, the stock was down 4.07% (Q2 2011), 4.23% (Q4 2010), 4.53% (Q3 2010), 4.04% (Q2 2010) and 4.32% (Q1 2010).

It is actually quite astonishing how repetitive human behavior happens to be. The stock closed down almost exactly by 4% from its opening price post-earnings. But that is not the only thing that is remarkable. As you can see from the chart posted above, in 6 out of the last 9 quarters, Apple set its 4 week high during the first week of trading.

Moreover, if you compare the intra-period losses to the intra-period gains, it is clearly that the risk is to the downside from the opening bell the day after Apple reports. In every single case without exception, Apple saw some sort of a drawdown from its opening price post-earnings.

In fact, eight out of the last eight quarters after the financial crisis, Apple seen at least a 5% sell-off from its opening price sometime over the ensuing 4-week period. This tells you that you’re never just going to get some huge lift-off on earnings where Apple flies to the moon and never looks back.

Take a look at this quarter for instance. The stock saw a 2.37% rise from its opening price during the very first week after it reported earnings. Yet, during the ensuring 3-week period, the stock lost 10.92% from its opening price.

If you look at the last 8 quarters, there was not a solitary quarter where the intra-period (4-week) highs from the open where greater than the intra-period (4-week) lows. In every quarter since the financial crisis, the intra-period low was a greater percentage from the open than the intra-period high. In fiscal Q2, it was a 6.31% intra-period loss which came in week 4 versus a 0.04% gain which came in week 1.

And there really wasn’t much of a difference in any other quarter. In most case, the intra-period low was far greater than the intra-period high. Thus, from a risk-reward standpoint, it makes a lot of sense to sell short-term positions, hedge intermediate-term positions and long-term positions right at the opening bell.

That is the general rule of thumb. But as you’ll soon see in the next Apple series that we will be publishing shortly, there are some interesting issues to work through when looking at premiums in situations where the stock does move higher from its opening price. We’ll be getting into that this week.