What can you do when your dreams come true
And it's not quite like you planned?
What have you done to be losing the one
You held it so tight in your hand well
Time passes and you must move on,
Half the distance takes you twice as long
So you keep on singing for the sake of the song
After the thrill is gone
(Eagles, "AfterThe Thrill Is Gone," 1975)
What exactly happened yesterday when the whole market went bonkers with Apple (AAPL) is hard to tell. One thing I am sure of, it wasn't one specific thing that happened and it wasn't coordinated as many believe. Sometime things just happen and many times there is no explanation for them. Some reasons are tangible and can be seen by the naked eye and other reasons are not.
Competition and margins
Samsung is by far Apple's biggest competitor. Samsung sold over 20 million Galaxy S III phones in the first 100 days. But since those first 100 days, Samsung Galaxy sales have gained momentum and today the Galaxy S III is the number one smart phone in the world.
Samsung does not sell as many tablets as Apple does. In fact until recently, it sold about 1/20th the tablets Apple sold. But things are changing. Apple's tablet share fell to 40% from 50% last year, even though Apple sold more tablets. But in terms of market share, Samsung is gaining and in fact increased its tablet sales by 325% in a recent report. What this means is that Apple has everything to lose and Samsung everything to gain as far as market share in the tablet space is concerned. Why? Well when you are the leader in market share, then you have everything to lose and the competition has everything to gain. And assuming Samsung will keep breathing down Apple's neck, at some point in time Apple will have to decide whether to sacrifice margins or market share or a little of both.
The avalanche effect
Anytime margin requirements are raised for any individual stock or asset class, then institutional investors, hedge funds and high speculative players have to re-balance their portfolios to take into account these new requirements. Yesterday there were many reports that margin requirements were raised for Apple's stock by a firm called COR Clearing. According to streetinsider.com, COR Clearing's cited "high concentration". I assume this means high concentration of margin activity.
There are many clearing firms out there and just because one of them raised margin requirements is not enough to pressure a stock like Apple and cause yesterday's carnage.
However, the news that someone is raising margin requirements might do to the trick, even if the selling action from this one firm might not be enough to bring down Apple on its own. Let me explain.
Apple is probably the most margined stock in the market right now. Why you ask? Well, because I have yet to meet someone who doesn't think Apple is a steal at these levels (except yours truly of course). So the easiest way for investors to win a small lotto ticket, is to fill their brokerage accounts with Apple stock and margin and wait for the generosity of market to make them the money.
As such, when word breaks out that someone is raising margins, citing "high concentration", and a small group of investors has to sell, then that makes everyone sell trigger happy also.
On the one hand, there might be "high concentration" in other clearing firms also (a sure bet I say), which might also lead other firms to raise margin requirements as well, and on the other hand, if this is the case, that might lead to forced selling that will put additional pressure on the stock in the future.
And because I am not the only one with these thoughts, everyone sells at the same time, even though the selling action from this one firm might not have been enough to cause the dip in Apple's stock we all witnessed yesterday.
(click to enlarge)
Apple's stock has thus far failed the short term 50 day moving average as well as the 200 day moving average. So while this might not mean much to long term buy and hold investors, it means a whole lot to people (like me) who pay a bit more attention to the charts. And the same goes for program traders, for these two moving average parameters are embedded in just about every electronic program trading algorithm there is. Also, price action below the 200 day moving average might also suggest that the long term uptrend for any stock is over.
The thrill is gone
I have noted many times (see my Apple logic articles here) that I think Apple will become a dog stock. Also, I have said there is not much juice left in Apple for long term buy and hold investors. If I am correct, it also means that speculative portfolios are either out of the stock or are going to exit over time.
Now I know what you are about the hear might sound like out of the box logic, but in my book when a stock has close to zero possibilities of doubling or tripling over a 12 month period, I don't bother with it. I might swing trade it if I think it's over-sold, but under no conditions will I buy and hold for the long term.
If you are buying Apple for long term appreciation and dividends and because it's a good store of value, that's fine. But don't expect Apple to be a 5 bagger. As such, the thrill and excitement of extraordinary returns is simply not there anymore. And when the thrill of extraordinary returns is gone, then there is not a whole lot of reasons to hold onto the Apple. In which case, you are more prone to sell it than to hold on to it. In other words, you become trigger sell happy. I think that as more and more investors realize this, more and more will chose to sell.
An example of thrill stocks are Nokia (NOK) and Research In Motion (RIMM). I insist that both Nokia and RIMM will take market share from Apple, will cause a margin squeeze and will close the technology gap in the space. And if you want some investment thrill, then these two stocks are the ones to have in the space, for these two can provide extraordinary gains compared to Apple.
And if you have followed my Nokia and RIMM logic, you know that I think both of these stocks and go up anywhere from 5-10 times over a period of time, assuming of course that they execute their strategy correctly, which I think they will.
And if you look at comparative returns as of September 7 (when I told you to sell Apple and buy the other two), you will see that the market has had the same conclusion as me.
There are many reasons for yesterday's Apple price action, not just the reasons mentioned here. Most of those reasons will go unnoticed by most of us. By coincidence of faith however, somehow all of those reasons bonded together yesterday and prompted investors to sell.
As for myself, the main reason I think Apple fell is that Apple has lost its investment thrill. And when the thrill of anticipation of extraordinary returns is gone, "time passes and you must move on", as the song says.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.