Apple's (AAPL) stock is one of the great successes in the history of the markets. But its price has been in decline for roughly two months, seemingly falling as easily as it rose.
There have been countless articles written about this decline and why it either is or isn't warranted. However, while most of those articles scrutinize the details of Apple as a company to predict how low its price will go and what it may or may not be worth in the future, many of them overlook Apple's role as a stock in the broader market.
As such, I think that the near-term future of AAPL has very little to do with the long-term outlook of Apple. Mr. Market is - at his core - an irrational man. And looking at Apple's spectacular rise through the lens of that irrationality is the best tool to help predict the depths to which it will fall.
A Psychological View Of The Markets
I'm not going to discuss the numbers regarding Apple's valuation, its recent earnings, its future earning, its margins, its dividends, its balance sheets, its market-share, its product's prices, or even its sales. In fact, I'm not going to discuss very many numbers at all. At least not in the typical "fundamental analysis" sense.
But before my readers think that I'm advocating a total ignorance or discounting of fundamental analysis, I should clarify. The analysis of a company's financial fundamentals is crucial to any investor's decision of whether or not to buy shares of that company's common stock. But fundamentals - although driving the lion's share of a stock's performance over time - don't tell the entire story.
Stock prices don't move up and down because a company makes more or less money than it did before. Stock prices move up and down because more or less people want to buy or sell a stock at any given time. The factors that can change the public's outlook on a company are myriad, and admittedly, most of them are tied to how much money it has made and is expected to make.
But most does not equal all, and since in the end supply and demand impact stock prices more than revenues and margins, investors should remember that just like baseball, the stock market is ninety percent mental. Only the other half is financial.
The Psychology of Apple
The past five years of Apple's performance in the stock market are impressive to behold.
Looking at the chart, Apple's growth follows a linear path since it began to recover from the hit it - along with most other stocks - took during the financial crisis. During this time, Apple consistently grew its earnings in a similarly linear fashion, driving the price of the stock steadily higher.
But in 2012 that linear growth shifted to an exponential rate, and the stock's price rose nearly 50% in the first quarter of this year. There are two main reasons for this jump.
The first is that in January, the company reported Q1 2012 earnings of $13.87 per share compared with just $7.05 in Q4 2011. This massive spike was enough to convince many investors that Apple's growth was inevitable, and that the stock still had plenty of room to run. It suddenly became attractive to all of the investors who believed they'd missed out on the chance to profit from it, and they began to aggressively buy shares.
The second has more to do with human nature than it does with iPhones or iPads. People like to be on the winning side in sports, politics, and investing alike. Investors especially like showing off a portfolio full of blue-chip stocks with stellar returns. And on August 11th, 2011 Apple became the bluest chip of them all when it surpassed Exxon-Mobil (XOM) in market capitalization. Earlier this year, it became the most valuable company in the history of the stock market, replacing Microsoft at its peak. Throughout this process people started to buy Apple not because of its outlook on future growth, but because they wanted to own a piece of the biggest winner of all time.
And it's only by understanding just why so many people bought the shares that raised its price to its roughly $700 peak that we can begin to discuss when they'll stop lowering its price by selling them, and ultimately calling a bottom for the stock.
Apple And The Index
As the single biggest player in the index, Apple has more influence on the movements of the S&P 500 than any other stock. This creates a feed-back loop, where investors buy Apple to own the biggest piece of a rising index in a bull market, while the index grows disproportionately because of the rising price of Apple. This causes even more people to buy.
Many of Apple's shareholders bought into the company this year, meaning they've entered the stock at historically high prices at the same time that the S&P - and the broader market along with it - was nearing historic highs. It's no coincidence that Apple closed at its highest price of $702.10 on September 19th, just days after the S&P closed at its yearly high of 1465.77 on September 14th.
Since Apple's weight and the psychological loop it creates can carry the market up, it's no great leap of logic to conclude that the same process can work in reverse on the way down.
Finding The Bottom
If people bought Apple because the markets rose, they'll keep selling until they stop falling.
Admittedly, Apple has slid further from its peak than the S&P 500 has, with the two losing about 25% and 7% respectively. But just like Apple's outstanding past earnings have enabled it to outperform the market for so long, its recent batch of disappointing earnings are having the same effect on the downside. Additionally, the company's financial statements only concern those investors who bought because of earnings in the first place.
So many other shareholders bought because prices - both of Apple and of stocks in general - were rising, and are now selling because prices are falling. This explains why Apple began its journey to the downside more than a month before its Q4 2012 release, and why its slide suddenly reversed within minutes of the S&P 500's rebound on Friday
On top is Apple's intraday chart for 11/16. Below is the same day for the S&P 500. Apple found its bottom for the day at 11:32; the index found its at 11:30. Although the charts don't sync up perfectly, the correlation between the price movements of the two is quite strong, and supports my theory that Apple's price movements in the near-term are inextricably linked to the health of the larger market.
I don't know if Friday's intraday bottom is the start of a trend reversal for both Apple and the whole stock market, or if it's just a temporary bounce during a longer trip down. There are many factors causing the bearish action of the past two months, and the point of this article is not to claim that Apple and the markets have already found their bottom.
Instead, I only seek to share my view that the investor psychology that drove Apple's price up to its peak has also worked to drag it down, and that this downward force won't stop acting on the stock until the entire market adopts a more bullish attitude.
I don't know what Apple will be worth in a year. But I do know that it's still the king of the mountain, and that its recent slump has less to do with its individual performance as a company, and more to do with the performance of the entire stock market.
If you want to know when Apple will end its slide, all you need you to do is figure out when the market will end its correction. And that, of course, is far easier said than done.