Where's The Hot Money Drained From Apple Stock? Can Behavioral Analysis Find It?

| About: Apple Inc. (AAPL)

Did it get scared and decide to hide in bonds?

Or maybe gold and silver was the refuge of choice?

How big a stash are we talking about? I've heard comparisons of a withdrawal of capital as big as the entire market cap of Microsoft. When Apple was at $702, its outstanding 940 million shares were worth $660 billion. Then, at $428, they only equaled about $400 billion.

That's a loss of some $260 billion, over a quarter of a trillion dollars. Microsoft only has a market cap of $235 billion. And AAPL lost that all in just six months!

Hey, wait a minute. Nobody, not even a crowd, looted Apple Inc. (NASDAQ:AAPL) of $260 billion. Those are fantasy figures. The $660 billion only existed in peoples' imaginations, as do all market-cap dimensions.

Let's look at what kind of capital actually went into AAPL stock to drive its price up to that $702 share price. We wrote about it in an article last September, near its peak.

AAPL shares currently trade some 19 million a day, enough to turn over its total shares in just 50 market days, or ten calendar weeks. Since its market peak last September, the whole capitalization has been bought and sold more than 2½ times.

All of the shares that were there are still outstanding, and being traded. What has been extracted in the process is simply incremental capital, the monetary reflection of investors' hopes and fears, cumulatively, for the company. All the rest of the nearly $9 billion traded each day is just capital changing hands between investors.

The math is easy -- each day's share volume times the closing price is the total capital traded. But if the price decreased from the prior day's market quote, it is only the price decrease percentage of the total capital traded that has been taken off the gaming table.

On any day when the price rose, then a similar proportion of the day's trade was added to the ante.

Day by day, it's put or take. Here's an update of our earlier track of how AAPL's incremental capital inflows and outflows have tracked over nearly a decade.

From 2004 on, there had been a steady build-up of incremental capital worth nearly $10 billion. That then was drawn down in the 2008 financial crisis to a mere $1 ½ billion, after which another $10+ billion was brought into the game by mid-September 2012.

The 2008-2009 drawdown then was approached, but not quite equaled, by a -$7 ½ billion withdrawal since the September 2012 peak. Now the cycle may be ready to reverse once again. The whole six month extraction has been less than one day's worth of capital traded.

But where did that $7 ½ billion all go in this interim? And where may it come from if the AAPL play is to be restarted? To get possible answers, it may help to do some investment behavior exploration of what has been going on at some of the other gaming tables.

What's It All About, Alfie?

To think about which investment alternatives to examine, let's think about the possible mindsets of the involved investors.

Why had this capital been in AAPL to begin with? What was its purpose, for the players who risked it there as the stock started to take off? Probably not to hide from risk exposure, thus minimizing return. Instead, likely it was to make an intelligent tradeoff between risk and future return, a judgment call. Once started, players were increasingly climbing aboard for the ride.

If that is the case, then this article's opening questions, suggesting defensive alternatives, would probably lead our exploration in the wrong direction.

Let's look instead at investments that would have offered a continuation of the highly satisfying (up to its turning point) AAPL experience. And ones that could absorb the billion-dollar scale of the exercise. Several things that have skyrocketed in the interim have entire market-capitalizations measured in a few measly hundreds of millions. They couldn't have any chance of absorbing a noticeable part of AAPL's drawdown. We can focus on the billion-dollar-a-day traders.

Here is a list of active, big-cap stocks and ETFs that could be alternative investment targets for the deployment of liberated AAPL capital:

Since we're looking for things that have been driven up by pieces of this $7 ½ billion, the easiest first cut of likely candidate beneficiaries is to exclude those that have had lackluster price performance over the past half-year. They are indicated by the right-hand column, headed by "Price Change." That excludes the precious metals, ETFs like (NYSEARCA:GLD), (NYSEARCA:SLV) and others.

It also rules out the Nasdaq-Index-tracking ETF QQQ, held back by AAPL's own huge presence. Other big-cap underachievers include Exxon-Mobil (NYSE:XOM), Intel (NASDAQ:INTC), and Microsoft (NASDAQ:MSFT). These are all in the lower section of the table above.

Of the surviving candidates, the single one that daily involves the most trading value is "everyone's" market-hedging tool, the oldest and biggest ETF, the S&P500 index SPDR (NYSEARCA:SPY). It regularly trades some $20 billion each session. It probably could by itself envelope AAPL's daily average decline in incremental capital of $60 million.

Let's see if it picked up at least $7 ½ billion in the six months since September's AAPL peak price.

Oops! SPY had its own problems in the 4th quarter of last year, losing $2 ½ billion as the ETF's price declined from 145 to 135. In Mid-November, it turned and eventually added a little better than $2 billion, to get back almost even with its September start.

So, it's possible that only the latter part of the AAPL capital liberated during these six months wound up in the "market hedge."

But "hot money" is less likely to take harbor in a market-average vehicle, unless the overall outlook is bereft of attractions, an unusual condition. That tends to minimize consideration of the ETF small-cap index [RUT] tracker (NYSEARCA:IWM), which has a trading capacity of $3 billion daily. Still, this is a case where some of the hot money from AAPL could have gone.

From the market's mid-November upturn, the IWM found some $900 million of new capital enthusiasm. During the whole period, the net added increment was only $400 million.

Next most capable in the list of likely and capable recipients of attention is, logically, Google (NASDAQ:GOOG). It trades about $2 billion each day. It and Bank of America (NYSE:BAC), same trading size, are likely to appeal to retreating AAPL investors. BAC is a troubled situation likely to be on the rebound, and GOOG is the most prominent competitor to Apple in the consumer/Internet space.

First, let's consider Google's incremental capital inflows and outflows during the past six months.

On October 18-19, GOOG took an 8% hit on its price and suffered a $900 million loss of incremental capital in two days. It looks like a classic case of a major institution making a major negative decision on the stock and cleaning it all out. But following that, some $600 million has been restored steadily at a rate that would involve amounts about equal to 10% of AAPL's outflow.

Next, Bank of America continues struggling to regain investor respect, with some success in brief periods. One of those periods drew in $600 million of incremental capital in five weeks, from early December to early January.

The other banksters are also candidates, trading gross values of over a billion dollars of stock values a day. Here, first is Citibank (C}.

A case can be made for some $700 million of incremental capital additions to C being sourced from AAPL, the most evident so far.

As for JPMorgan (NYSE:JPM), perhaps another $200 million could have come from liquidated capital liberated from AAPL. Here's its picture:

That leaves Facebook (NASDAQ:FB), which seems like a logical prospect.

Well, look at that! Here is an inflow of $2 billion of incremental capital, just at the time AAPL is on the downslide. Unfortunately, it didn't seem to do much lasting good for FB at this point. But FB still has lots of potential, which may yet be proven out.

So, from the seven best potential candidates to have benefited from removal of incremental capital from AAPL, we may be able to account for $ 7 billion of the $ 7 ½ billion identified. SPY soaked up $2 billion, IWM accounted for $900 million, GOOG took $600 million, as did BAC, Citi was in for $700 million, JPM hit $200 million, and Facebook did the other $2 billion.

And what happens when investors return to AAPL?

Now, what are the implications if interest in AAPL once again builds attention? Will it put a chill on any of the issues that have been helped?

SPY is too big and diverse to be affected by any one stock, with the possible exception of AAPL. But if AAPL is heating up, it helps build SPY's value, so there is reinforcement.

IWM and GOOG appear strong enough on their own to compete for the increments they got. The bank stocks also look like they are in a recovery trend, and JPM's boost is the smallest of the lot.

The one problem might be Facebook. It ingested a lot of incremental capital, and did not show a proportionate benefit. The stock still needs market seasoning, and has to prove itself economically. A return to obvious attraction by AAPL could seriously undermine its near-term market prospects for the better part of a year.

Looking at incremental capital flows is a look at the past. It only tells what has happened, not what is likely to occur next. To get a sense of that, it is necessary to see how market-makers protect themselves as they take on everyday necessary risks with the firm's capital.

Here is how that professional community has been behaving for the past six months with trades in FB. The trend of price moves they feel compelled to protect themselves against has an unfortunate downward slope so far in 2013.

On the other hand, the outlook for GOOG, instead, looks much stronger.

(used with permission)

Only time will tell, but GOOG looks like it may be a safer bet.

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.