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What to make of Apple’s new volatility

When the market falls, Apple shares usually fall further. Investors should brace for the worst if the broader market continues its decline.

By Andy M. Zaky

For as long as I can remember, Apple (AAPL) has been a slave to the direction of the broader market despite its unusually strong fundamentals. Whenever the broader market sells off, Apple’s drop is more severe. When the market rallies, investors tend to focus on Apple’s excellent fundamentals, and the price action becomes more representative of what the stock should be worth.

For example, in August 2007, while the DJIA underwent a 10.7% correction, Apple saw its stock price get utterly slaughtered, falling 33% — triple the market’s move. And this came at a time when the iPhone craze had just hit and Macintosh computers were flying off the shelf in droves. There was no clear fundamental basis to warrant such a big move down.

That October, it happened again. In a 4-day period, the Dow dropped 8% while Apple shares plunged 21.9%. In January 2008, when the bear market first started to pick up steam, the DJIA experienced a 13.5% correction in a two and a half-month period, while Apple’s share price was nearly cut in half, from $203 to $115. Again, this came at a time when Apple’s fundamentals were arguably stronger than nearly every other stock in the U.S. equity markets.

Throughout the financial crisis, Apple posted one record quarter after another, posting huge increases in revenue and earnings. In fact, there was a lot of evidence suggesting that Apple was the most undervalued of the large cap tech stocks and by quite a large margin. To get an idea of just how irrational the market got with Apple during the financial crisis, the Financial Select Spiders (XLF) fell 70% in the same period of time when Apple dropped 60%. The market treated Apple as if it were a financial stock despite its massive cash horde and zero debt.

On Tuesday, shares of Apple plunged 4.5% while the DJIA shed 2.7%. Will history repeat itself or have Apple’s strong fundamentals become so widely known as to make it more immune to the whims of the broader market? This question couldn’t come at a better time as discussion over this gigantic 8-month head & shoulders move in the stock market makes its way through the financial world.

Several technical analysts believe the market is getting ready to make a very big move down in the markets, and that there’s a growing possibility that a double-dip recession might even take us down to retest the bear market lows -– though I don’t think this is a strong possibility at the moment. Yet, evidence suggests there’s a strong case to be made for a move to 950 on the S&P and 8800 on the Dow. If we get this sort of dramatic drop, what should Apple investors expect?

One can argue that a big move down in Apple’s stock price might be in the cards over the next few weeks. At the same time, however, Apple has held up quite well in the face of this May–June 2010 correction. While the market has plunged almost 13%, Apple even made new all-time highs of $279 right in the middle of this correction.

In the past, a 12-13% sell-off in the markets usually amounted to a collapse in Apple’s stock price. But that didn’t happen this time, despite the fact that a sell-off is well overdue since the stock has catapulted straight up from a bear market low of $78 to $279 without any meaningful pullbacks.

That being said, when Apple outsells the broader market, it tends to be a bad sign for the market overall and for Apple investors in particular. Apple has been the market leader in this recovery, and once the market starts to lose faith in its leaders, that’s when things really unravel. So while some evidence suggests that the 2010 Apple is a new and more resilient Apple than the Apple of the past, recent weakness in the stock appears as if it is ready to resume its old ways.

Andy Zaky is a graduate from the UCLA School of Law, and editor of Bullish Cross. His main area of emphasis is in global macro-economics, fundamental analysis and technical analysis. Andy also regularly follows and conducts financial statement analysis and quarterly earnings projections for Apple, Inc. and other high profile tech stocks.