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On February 6, 2014, the Wall Street Journal reported that Apple (NASDAQ:AAPL) had snatched up $14B worth of its own stock following January's post-earnings sell-off: $12B in an accelerated buyback and $2B in the open market. In the interview, Apple CEO Tim Cook touted how the $40B spent by AAPL to buy back stock in the past 12 months is a public company record over such a timeframe. This news likely helped AAPL run-up another 6.5% over the next 8 (calendar) days. Forbes recently provided some great perspective on the enormity of AAPL's recent spate of buying:

"…in the two-weeks following the most recent earnings announcement, Apple bought back almost two-thirds the value of shares that it had purchased in the entirety of 2013…

the $14 billion two-week binge was actually more than what all but three companies (excluding Apple) spent on buybacks all last year. ExxonMobil repurchased $17.9 billion, AT&T (NYSE:T) bought back $15.5 billion and Pfizer (NYSE:PFE) spent $15.2 billion. In fact, only 7 companies (excluding Apple) bought back as much as $7 billion. So while comparing the overall repurchase amount to the market cap of Apple seems to dwarf the value of the investment, $14 billion allocated to buying back stock is an enormous amount to spend in a one year period, let alone two weeks…"

(Note I am not completely sure why two weeks is usually quoted for the post-earnings buyback given the WSJ report came just 10 days after AAPL reported January earnings. Perhaps it is just easier to round up than to say "a week and a half").

Despite the impressive scale of these purchases, they surprisingly failed to sway the growing negative sentiment in the stock. Indeed the complete reversal of those gains "post-news" over the subsequent 8 days may have its root in that negative sentiment.

Apple's post-earnings recovery hits a brick wall

Source: FreeStockCharts.com

There are many ways to look at the negative sentiment that still holds a strangle on Apple's stock:

  • Despite a year of buybacks, AAPL still trades right where it did before the post-earnings collapse in January, 2013.
  • The announcement of the deal with China Mobile (NYSE:CHL) failed to generate any follow-up momentum and is now the top of the current downtrend. This downtrend is starting to get defined by a downward sloping 50-day moving average (DMA).
  • As stated above, all the gains following news of Apple's accelerated buyback and open market purchases were reversed in the same time it took to generate those gains.

These are all observations from the price chart. There are other clues. A Bloomberg article reporting on Apple's annual shareholder meeting referenced a Morgan Stanley report calculating that Apple's top 30 institutional holders held just 30% of the company's stock. This share is a record low and is down from the peak of 40% in 2009. Even more telling could be the action in short interest and the open interest put/call ratio.

Short interest in AAPL is still a very small 3% of float. However, it is back to a 7-month high and soared from 16.5M as of January 31, 2014 to 26.4M as of February 14, a very surprising 60% increase even 8 days after the news of AAPL's purchases. Shares short had been relatively stable since dropping to 17.6M on August 30, 2013.

The open interest put/call ratio has also soared in recent weeks providing a 1-2 punch of negativity in combination with the soaring short interest. The open interest put/call ratio is now at a 92 percentile over the past year. It was as low as 0.5 in late December and in two months has jumped almost 50% to 0.72. Again, the news of more buybacks did not sway this negative crowd.

In earlier posts, I have demonstrated how sharp increases in negative sentiment in AAPL have accompanied rallies in the stock, in particular, the open interest put/call ratio has provided a telltale sign. This was again true until the post-earnings rally hit the brick wall show in the chart above. Now, I am a little more worried as the entire context of accumulated signs of negative sentiment run in stark contrast to headline good news. Moreover, Apple continues a streak of strong under-performance relative to the general stock market.

Perhaps the next firm, freshly positive catalyst will provide the spark to follow-through on Apple's buying spree. At least a breakout from the current downward trend could be enough to turn sentiment around. However, the current trading behavior in Apple's stock suggests it will meander until April's earnings report, perhaps even retest post-earnings lows before that point. April's earnings is shaping up to be another defining moment for the stock. Last year, it provided a bottom. This year, it could deliver the difference between a failed buyback program and a successful one (at least in the intermediate-term).

Be careful out there!

Source: Apple's Post-Earnings Buyback Fails To Sway Growing Negative Sentiment In The Stock