Apple's Sentimental Journey: What Intelligent Behavioral Analysis Reveals

| About: Apple Inc. (AAPL)

Apple, Inc.'s (NASDAQ:AAPL) -9% market-price drop this week, contributing to its 3-month retreat of -24%, has all kinds of I-told-you-so commentary coming from the Osotts. (They're the Other-Side-Of-The-Trade folks, remember them?)

Rejoinders by the Ysotts (Your-side…) are flying just as fast.

Huzzah for Seeking Alpha! This is what they do so well, presenting cogent ideas from both sides. From better-than-average sources, ones otherwise less-than-likely to be heard.

Facts known, facts unknown, facts newly discovered, and insights, with experiences - both surprises and reinforcements, - expectations, opinions and forecasts, norms and standards, all flow forth to color future investment decisions. They're coalesced into what is usually referred to as investor sentiment.

Seeking Alpha's newest effort to identify and highlight the best of these in their "Pro" and "Alpha-Rich" articles, furthers this service to investors - both individuals and professionals - who are deluged by volumes of promotional noise from the investor-relations and "sell-side-of-the-street" communities.

What results, as we have previously identified as "mankind's second most-serious game" (next to war) between the O's and the Y's, a continuing series of capital flows into and out of the stocks under attention.

For AAPL, which at its September peak represented an over-$620 Billion market capitalization - some $120 billion apparently just disappeared, a flow that can't be considered trivial. As Fred Schwed once asked (in "Where Are the Customers' Yachts?"), "Did you lose it, or was it stolen?" Strangely, similar questions have been asked of FNMA, Jon Corzine, the Facebook IPO, and others, but I digress.

Not all of that AAPL market cap may have been realizable, as is suggested by present conditions. But how much of a real hit has been taken by AAPL investors, and how much has simply been moved to potentially more productive purposes? What might it take to re-polish the AAPL to its prior candy-red luster?

Here is one way to measure what has gone on: Take each day's share volume and multiply it by the price change from the prior day. Separate the results into two piles, daily gains, and daily losses, totaling each. Then put the two piles together, netting one against the other. This is easy. Anyone with access to Yahoo Finance and an excel worksheet program can do this. Practice with Angry Birds won't help much.

Surprise! The total capital removed from play (in AAPL) since its high of 9/19/2012 at $702.10, to Friday's close of $533.25, is "only" -$4.5 Billion. All the other part of the $701 Billion of total trading volume (as measured by end-of-day values) during those 54 days was simply going from one pocket to another (less, of course the cost of commissions, etc.).

Now how about performing the same exercise in the last 3-year period from 12/7/2009 (at $188.95 a share) to the 9/19 peak? Voila! It only took $5.7 Billion of active net investments, in the aggregate, to raise the whole cap value up by $450+ Billion. All the rest, the passive, buy-and-hold, investments, were just along for the ride.

It's been quite a ride. Even after a retained active injection (capital inflow) of +$5.7 Billion and a withdrawal (capital outflow) of -$4.5 Billion, a net of +$1.2 Billion, Apple's market cap moved from $167 Billion to $501 Billion.

The message here is that it is active investments that move markets. They are where the leverage on values resides. Philosophically, the investor needs to decide: Do you want to be a "mover", or get "shaken"?

All we have to do now, is know which way this cat will jump, and when. And decide whether to be a Y or an O, or be marked Absent by the scorekeeper.

The operative word, in the facetious first sentence of the paragraph above, is "know". Don't try this at home. Or any other place, for that matter.

As has been observed, usually unfortunately, the future is a dangerous place. It typically has much more uncertainty than the other kind. Measures of that imbalance among the betting crowd are referred to as ODDS.

The other relevant necessary measure in this context is payoffs, the result of taking, in advance, a Y or an O posture. What is needed is some reliable guidance as to direction and timing.

An ancient truism in investment circles is: "Those who talk, don't know, and those who know don't talk." Rumor has it this rule originated in a Sicilian brokerage office.

But modern information technology comes to the rescue, along with its change-paced opposite, human nature. Here's how it comes about:

If individual owners of capital have better ways to spend their time than listening to talking heads read cue cards on TV, they may have put their trust in some big-money fund that owns shares of AAPL. That fund wants to keep (fee-paying) control of those assets under management(?) (AUM), and get more of them, if possible.

So the fund-runners seek to intelligently play the "second-most serious" game as best they can. But there's this little [big] problem: They already own enough AAPL shares to make it tough to execute any meaningful ownership changes, up or down, even in a stock that trades over $1 Billion-worth a day.

That daily $1 billion is only 2/10ths of 1% of the market cap. And this fund owns over 4% of the total shares. That means that if they were the sole seller, it would take over 4 weeks to unload it all. Since most funds never want to be as much as 2% of a day's volume, the relevant number is 50 times as much, so maybe near 50 months, or some 4 years.

And this fund is not AAPL's largest holder.

So when the public gives the fund more money to get put into AAPL shares, they try to get as much help as they can. Also, when the public asks for redemptions, AAPL shares may need to be sold, along with other things. Think it's tough to buy in an "irrationally exuberant" market? Try the opposite. It has to be done like porcupines making love - very carefully.

The helpmates typically sought by funds in such situations are the market-makers.

Regular-readers of our articles like this one know the litany. To do what pays them the big bucks, the market-makers buy price insurance to protect the capital they must put at risk. What they will pay for that insurance, and the way it is structured, tells what they think their big fund clientele is likely to do to the price of the stock in question, either as a buyer or a seller.

So now we have another opinion, but one arrived at by a very well informed player, and one prepared to play either as a Y or an O. One with some informed sense of which, at the moment, may be the better posture, and a plan to avoid trouble, either way.

Still, it's just an opinion - about the future. Want to know the odds about the ODDS? And the potential payoffs of the payoffs? So do we.

So we check history to see how well this community of market-makers has fared in the past with their opinions. An earlier discussion of that matter can be found here. At this point the relevant measures are: The past AAPL-experience odds of reaching a plausibly possible upside of $640 (+20% from $533.25) or at least something above that current price, within the next 3 months, are only 43 out of 100.

Whoa! Say the Ys. "Who says so?"

Answer, "The guys making book on what it costs to protect against being short the stock here and seeing it get up that far."

"But," says the Y negotiator, "the average gain in 3 months after prior upside-to-downside forecasts like today's (+20% vs. -2.7%) has only been +10.2%. We would like to see +20%, but would also like to see better odds for gain. What are the odds for only a +10% change?"

Market-maker: "Sorry, we don't know and can't tell ya. The only deal we can get on insurance requires coverage up that far, because the insurance sellers figure that it could happen, and they won't take the risk without that coverage.

"The market in AAPL is now seen as being more volatile than it has been. If there's no insurance, then there's going to be a lot less capacity to do trades, and price swings could get a lot wilder. Check out how the forecasts have been going recently. That's what the vertical lines are here, daily forecasts."

(used with permission)

"And," pipes up the O negotiator, "if the upside limit gets messed with, what does that do to the downside? It's now only a further drawdown of -3%, or even less. See that part of the vertical lines below the current price dot? Maybe there might be more negative if the upside gets pulled down."

Market-maker: "That's all just conjecture. Today it is what it is. Tomorrow is likely to be different. Things change, and lots of players continue to revise their limits.

"All we can tell you is that, paradoxically, if the forecast changes for a better balance of upside-to-downside than the current 9 to 1, say maybe only 4 to 1, the odds of gain for you Ys could get back to winning 70-75 out of 100, and in the past when that was the case, payoffs improved markedly over what is seen for now. That could happen if prices and downside expectations stop declining and firm up.

"Remember, the stock doesn't know that you own it or are short it. And the SEC can't prosecute either Ys or Os as insiders, based on what is learned strictly from the public markets for price insurance. Let's see what tomorrow brings."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.