When I was a kid, anytime I wanted to do something fun and my mother didn’t approve, she intoned: “If all your friends jumped off the Empire State Building, would you?” When it comes to Apple stock (AAPL) apparently the answer is yes, at least according to the market. Yesterday in the midst of the 634.76 point DOW selloff, AAPL closed down $20.41, a 5.46% tumble, and the market action looked absolutely schizophrenic. Take a look at this two day chart of AAPL using five minute bars.
Pretty scary right? Being an AAPL watcher, and a lover of roller coasters, seeing the stock whipsaw nearly 14.75 points, from a low of $353.02 to a high of $367.77 today can be both exhilarating and panic inducing, but in my opinion, it doesn’t mean a thing.
All too often we get caught up in the heat of the moment and don’t take the time to breathe and look at the larger picture. So let’s take a look at the larger picture. The following chart is three months of AAPL market activity with each day’s close represented by one bar.
Now, don’t you feel better? If you’re a short term trader the answer is a big no, but traditionally market timing has been a losing proposition for most everyone and that’s becoming even more true over time. He who has the biggest computer tends to win and that’s not you. At least not unless you are a large institution or mutual fund since 71% of all AAPL shares are owned by 1649 of such firms. These firms absolutely love days like today since many of them make their money the newfangled way: arbitrage.
Arbitrage lets computers do the heavy lifting. It’s something like printing money at no risk. A good example is in the options market. Let’s say that I buy a call, which isn’t buying the stock, but it’s a cheap promise that the stock I’m borrowing (at a service charge), will be bought if the stock attains a certain price by a certain date. This is a cheap bet that the stock will go up without having to lay out more than a fraction of the worth of the stock.
I can also buy a put which is the opposite bet, if I think the stock will go down. The point here is that I can control a lot of stock for a little amount of money either betting that the price will go up or down.
What arbitrage programs typically do is look for differences in the premium (service charge) between puts and calls and when one is cheaper than the other, buy or sell that. This can happen thousands of times a day or even an hour. Each transaction may only be worth a few cents, but the pennies do add up and since everything is automated and can happen just about instantly, there is little to no risk.
I know that I risk the wrath of those that know far more than I do about these markets by not being perfectly correct on how it all works, since it’s quite a bit more complex than I make it sound; but I just wanted to make the point, in gross fashion, by introducing the concepts of these trades.
My major point is that there are many more ways to make money on a stock than to have it just go up, and as computerized trading becomes more prolific and tends to filter down to average well-heeled traders, it will just get more complex with stock pricing having less and less to do with making the majority of the money. This is also one of the major reasons of the wild whipsaw pricing that we saw in AAPL today.
In a market full of uncertainty, and we haven’t seen this much uncertainty in some time, I feel the market is prone to more programmed trading than under comfortable times. Put that together with the old traditional approach to trading which deals with fundamentals, fear and greed and it’s party time.
Let’s get back to the average value trader who listens to well paid analysts and is only concerned with the price of the stock going up. Philip Elmer-Dewitt of Fortune’s Apple 2.0 surveyed such analysts a few weeks ago and found that everyone he talked to believed that Apple stock had a long way to rise with price targets ranging from $450 to Ticonderoga’s Brian White who weighed in at a whopping $666 (which may be the mark of the market). The post showed most analysts raising their price targets, with no one lowering them.
If you’re still a bit skittish over Apple stock, perhaps this chart of closing prices covering the last twelve months will soothe your troubled soul.
Doesn’t that make you feel better? I think you can close the window now.
Full disclosure: The author owns some Apple stock and nothing in this post should be taken as investment advice. He was not influenced by his mother and although he lives about 25 miles from the Empire State Building he has no intention of visiting it any time soon.