The financial markets have been roiled in recent weeks by the continued spread of the deadly Ebola virus and a steep drop in oil prices. For a while, though, shares of Apple (NASDAQ:AAPL) resisted the selling pressure thanks to excitement about the iPhone 6 global rollout.
More recently, Apple stock has started to lose altitude. On Wednesday, the stock fell as low as $95.18, more than 8% below the all-time high it hit last month. An increasing number of people on Wall Street have become fatalistic about the stock's prospects and are now predicting that it will fall further.
Investors shouldn't give in to this fear. While there's no way to be sure where Apple stock will go in the short term, its long-term earnings prospects look better than ever -- and that's all that really matters in the long run. In fact, a strong earnings report on Monday October 20, 2014 could put a quick end to these worries.
Headed for a crash?
In a recent blog post publicized by MarketWatch, J.C. Parets -- who runs a hedge fund called Eagle Bay Capital -- suggested that a declining appetite for risk in the bond markets was likely to spill over into the stock market. Parets called out Apple stock in particular as a candidate for a correction.
That statement followed up on an Oct. 7 blog post in which Parets argued that, based on Apple's recent share performance, the stock had run out of momentum. He concluded that Apple stock was "probably in a lot of trouble" and claimed there was "at least 10%-15% downside" for investors.
Since those blog posts, Apple shares have fallen below the recent trading range of approximately $97.50-$102.50.
For technical analysts, this is a worrisome sign of a downside "breakout." If the stock continues falling on Thursday and Friday, the hand-wringing about Apple stock will intensify. This obsession with stock market momentum is extremely short-sighted, though.
Looking in the rearview mirror
While stock charts are useful for seeing how a stock has been doing, here at the Fool we don't look at charts to try to determine whether to buy or sell. We don't put any faith in "technical analysis," either.
That's not to say that momentum doesn't exist in the stock market. However, it's not a reliable indicator of future stock performance. In the long run, what really matters is a company's earnings trajectory.
Indeed, stock charts can only tell you about the past. Trying to predict Apple stock's future performance based on its chart is like trying to drive while looking only in the rearview mirror. If the road is straight, you may get good results for a while -- but at the first curve you are destined to crash and burn.
A curve is coming up
Translating this notion into investing terms, the "curves" are major pieces of news. In the absence of significant news, momentum can drive stock performance. However, when new information on a company's earnings trajectory becomes available, it overrides momentum -- and usually doesn't take long to do so.
In the case of Apple stock, the last big news items came last month. On Sept. 22, Apple announced that it sold more than 10 million iPhones on launch weekend, and on Sept. 30 it announced that the new iPhones will go on sale in China on Oct. 17. Another big piece of news will come out in less than a week -- Apple is reporting its quarterly earnings on Oct. 20.
So far, all the signs look positive. Adoption rates of the new phones appear to be significantly better than what Apple achieved last year, even though China wasn't included in the iPhone 6 launch. Pre-order demand in China also appears to be very robust.
However, Apple knows better than any outsider how iPhone supply and demand are holding up. If it projects stronger December quarter results than what analysts and investors are anticipating, Apple stock's negative momentum will soon be forgotten.
Foolish final thoughts
Investors should be suspicious of reports that predict stock price moves based on momentum and technical signals and make no mention of revenue growth, earnings growth, or other financial indicators.
In the absence of any relevant new information about a company's prospects, momentum may rule the day. But beyond the very short term, a company's earnings trajectory determines the fate of its stock.
If Apple reports that iPhone 6 demand isn't as strong as it appears or that high production costs will cut into its profit margin, then Apple stock may really be in trouble. On the flip side, if iPhone demand is as strong as ever and earnings growth is about to accelerate, long-term Apple investors don't have a thing to worry about.
Adam Levine-Weinberg is long January 2016 $80 calls on Apple. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.