How to Trade Apple's Bungee Jump

Tickers in this article: AAPL
NEW YORK ( TheStreet) -- The performance of Apple (AAPL) since setting an all-time high at $705.07 on Sept. 21 is mind boggling considering that the stock has 22 strong buy ratings and 28 buy ratings according to Yahoo Finance. Apple has only 5 hold ratings, one under-perform rating and one sell rating.

At www.ValuEngine.com we have been tracking Apple using a three-pronged approach that helps investors and traders capture volatility in a strategy I call buy-and-trade.

ValuEngine provides a quantitative approach to equity analysis that begins with the stock valuation model, which is based upon many variables. One important data point is the 12-month trailing P/E, which is 12.47 for Apple. A second important piece of data is the 12-month forward price to earnings ratio, which is based upon Wall Street estimates. For Apple the forward P/E is 10.62 (Yahoo Finance shows 9.49). The third important input is the yield on the U.S. Treasury 30-Year bond, which is 2.77% at Thursday's close. The current low yield environment elevates equity valuations.

The most important calculation from the valuation model is a stock's fair value, and Apple's fair value is $619.60, which makes the stock 11.68% undervalued.

We also know that Apple had a 12-month return of 41.22% and a five-year average annual return of 20.32%, which makes the stock one of the best performers despite the bungee jump since Sept. 21.

The most important calculation from the ValuEngine forecasting model is a stock's one-year price target, and for Apple this price is $578.53 for a projected 12-month gain of 5.72%. Since this reading is above 5% the stock's rating is currently a buy.

On Nov. 21, I wrote Santa Claus Rally Eyed for Online Leaders Apple, Amazon and Google with Apple closing at $560.91 the day before. In this post I suggested that investors and traders book profits on strength to the stock's five-week modified moving average at $586.46, which was tested on Nov. 26.

On Nov. 27, I wrote, Apple Wakes Up to a Downgrade to hold from buy. The first bungee jump off the Nov. 16 low of $505.75 came to a halt just above $594 on Nov. 29 and Dec. 3. Weakness to $518.63 yesterday, plus the return of the buy rating was reason enough for the stock to have a bungee jump to $553.31 intra-day.

The third component of a buy-and-trade strategy incorporates my proprietary analytics, which are based upon nine years of closing prices; the past nine week's, nine months, nine quarters, nine half-years and nine years. The resulting value level is the price at which to buy a stock on weakness and a risky level is the price at which to sell a stock on strength.