A massive decline in the Optimism Index for Apple

Key points:

• The Optimism Index for Apple saw a dramatic decline, with a drop of more than 50 points in two sessions
• Similar plunges in sentiment during an uptrend led to negative returns over the following month
• A two-session decline of over -6% from a 1-month high also suggests near-term caution for Apple

Sentiment for Apple, one of the big seven stocks, crashes amid China-related news

The prevailing question among investors centers on whether the decline in Apple's stock price, stemming from China's restricting local governments from using Apple products, signals a buying opportunity or the onset of a more substantial correction.

News-related price plunges like this one are difficult to assess as a certain amount of judgment is required. This one is even more difficult because it involves a foreign government.

As always, let's put more weight on our objective data-driven approach rather than our gut feelings.

Similar Optimism Index conditions produced unfavorable results

When the Optimism Index for Apple takes a nosedive while the stock is trading above its 200-day moving average, the negative momentum tends to persist throughout the following month, resulting in a median return of -3.6% and a win rate of 42%. Additionally, the median maximum loss outweighs the maximum gain during this time period. 

From a relative comparison perspective, the plunge in the Optimism Index suggests Apple could underperform the broad market on a medium-term basis. 

Price and sentiment suggest a similar fate

In cases where Apple registers a decline exceeding -6% in two sessions from a one-month high while still maintaining a position above its 200-day average, history suggests a tendency for the stock to decline over the subsequent month, resembling the behavior observed in the Optimism Index. 

Similar to the Optimism Index results, investors need to be cognizant that AAPL could underperform the S&P 500 over short and medium-term time horizons.

What the research tells us...

The shares in Apple plunged on the news related to China, sending the Optimism Index lower by over 50 points in two sessions, with the stock in an uptrend. Similar sharp contractions in sentiment tended to lead to a negative outcome for the shares over the subsequent month. At the same time, the stock declined by over -6% from a 1-month high. This price pattern has tended to produce unfavorable results similar to the Optimims Index results in the subsequent month. In both cases, Apple underperformed the broad market. While news-driven sell-offs are always difficult to assess, history suggests a cautious outlook for now.