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Realistic Expectations For AAPL

10/25/11 01:51:49 PM
by Mike Carr, CMT

Many traders think they can earn high rates of return trading stocks. That is actually a difficult task, but expectations of many buy & hold investors are also unrealistic.

Security:   AAPL
Position:   Buy

Stock market traders are usually optimists. They expect to be able to earn a reasonably high rate of return on their investment capital. Long-term investors often consider 10% a year to be average, while short-term traders expect perhaps twice that level to compensate for the increased risk.

Figure 1 is a monthly chart of the SPY, an exchange traded fund (ETF) that tracks the Standard & Poor's 500. Many buy & hold investors developed their return targets in the late 1990s, when annualized returns were generally above 20% a year. The 12-month rate of change is shown in the chart, with a green line marking annualized gains greater than 20% and the red line at zero. The reality that can be seen in the chart is that returns are just as likely to be negative as they are to be above 20% a year.

FIGURE 1: SPY, MONTHLY. The mean reverting behavior of stock prices can be seen in the 12-month rate of change of returns shown here for the S&P 500.
Graphic provided by: Trade Navigator.
This result is expected for the market as a whole. Long-term growth in stocks will generally be related to economic and population growth. Both factors have slowed in the past 10 years and performance of the stock market is showing the impact.

Individual stocks can still be long-term winners. Apple (AAPL), seen in Figure 2, has more consistently delivered returns greater than 20% a year for the B&H investor. A simple 12-month moving average on the long-term chart would help investors avoid much of the price declines.

FIGURE 2: AAPL, MONTHLY. Apple has been a long-term stock market winner.
Graphic provided by: Trade Navigator.
Short-term gains can be elusive for many traders. Long-term trading can also be profitable. Using relative strength to spot long-term winners could be the first step in the trade selection process, and using a simple monthly moving average could help avoid losses. Adding this as a core strategy could help traders in the long run.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."

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