How forecast-able is Apple's stock price in the near future?
We get our principal wealth-building equity investment guidance from the way market-making professionals protect the capital they must put at risk as they perform their essential functions for big-money fund portfolio managers. Their hedging in key Exchange Traded Funds [ETFs] suggests they now look for an equity markets decline. How much of that negativity may be due to Apple, Inc. (NASDAQ:AAPL)?
Just because AAPL has a market-cap of over half a trillion dollars, better than $100 billion more than 2nd-place Exxon Mobil (NYSE:XOM), and trades 6 times the $1 billion XOM does daily, doesn't make it an easier target. That is because institutions and professionals may not make up as much of the daily activity as might be imagined.
A quick clue comes from daily trading activity in the stock before and after the split. Before, AAPL traded over 77 million shares a day, after, only 50 million. The daily handle before was worth $43 billion; since the split: $4.5 billion.
Here is how the MMs have been betting on AAPL hedges daily for the past 6 months, including the week-plus since the split:
(used with permission)
For anyone new to this form of picture, the vertical bars are not actual price ranges on the day of the heavy-dot closing price, but are forecasts of likely prices coming in days or weeks ahead, based on the way that market-makers this day have hedged their firm's capital that had to be put at risk to "facilitate" trades in the stock. The balance between upside prospects and downside possibilities are defined by the then current market quote, and are measured by the Range Index [RI] whose value is that percentage of the full forecast range that lies below the market quote. AAPL's RI on 6/25/2014 was 36, shown in the center of the data row under the picture.
Other data in that row is drawn from AAPL's past 5 years' history of 1261 market days, 61 of which had RIs like the present. We apply a time-efficient investment discipline to those 61 instances. 93% of them offered profits between day-after-forecast investment cost and sales, either at the first occurrence of top-of-forecast range "sell target", or the close price on the inflexible 63rd market day (3 months) after the forecast.
The green verticals earned their color by very low RIs, defined by MM hedging actions. If the MMs are insightful in their self-protective actions, there should be reasonable relationships between their implied forecasts and actual subsequent market prices.
To test that notion out, we looked to see what was the outcome of our next 3 months' Time-Efficient sell discipline for every RI level of AAPL's forecasts. Here is how the relationships appeared on a scatter-plot:
That is far from an impressive fit. And since every instance below the horizontal line marked 1.00 on the left scale is a capital loss, regardless of Range Index, the ability of MMs to see into AAPL's price future is seriously brought into question. Further, an operational relation between RI and next period price changes ought to show a least-squares trendline from higher left to lower right, not what we have here.
After day-by-day analysis of some 3,000+ stock and ETF hedging activities, we have come to understand that some securities are well and actively dealt in by MMs, and others are not. It figures that MMs will focus their attentions on issues of active interest by their big-money fund clients. The 30 stocks in the DJIA index are prime candidates for such focus. In addition, there is an ETF that is structured in a way that its price is designed to move three times (3x) as much, daily, as the index.
Putting that ETF, the ProShares UltraPro Dow 30 (NYSEARCA:UDOW), to the above T-E 3-month sell discipline test produces the following relationship of its RIs and investing results:
Now this is more comforting. Range Indexes span a wider array, and profit results are dominantly positive, particularly where Range Index are lower, just as it should be. And the test is over the same exact time period as for AAPL.
But there is a disturbing question raised if AAPL is to become a member of the DJIA index. Will it spoil a very profitable forecast situation? We think an answer may be had in other of our forecasts, derived by the same methodology, for an index that AAPL already dominates, the Nasdaq-100. Helpfully, there is also a (3x) leveraged ETF for the Nasdaq-100, ProShares UltraPro QQQ (NASDAQ:TQQQ), that we have forecasts for (in the same period) to compare with UDOW. Here it is:
The scales on these three pictures have been kept identical, so that visual comparisons should not become misleading.
For TQQQ, by far, the negative T-E sell discipline test results have the dominant loss results at the right side of the picture, where RIs are larger (below the line left-labeled "1"), meaning more of their forecast space is to the downside. A quick visual suggests that TQQQ RIs above 25-30 should be avoided as buys.
Further, the apparent disparity between AAPL-dominated TQQQ and the stock itself suggests that there is far more proportionate involvement in hedging TQQQ by MMs than there is - or at least has been - between them and overall market activity in AAPL. Should AAPL become a part of the DJIA 30 Index, that may well change. The TQQQ relationships affirm that MMs know AAPL's situation and outlook, so it is more a situation of reading the hedging markets better.
Inter-market arbitrage is an active, present, discipline, and there will be influences across all strands of the equities spiderweb where called for, if called for.
But for now, the 7-for-1 split in AAPL clearly has produced a change in market action of the moment. The trend in MMs' expectations for coming prices is not very encouraging of buys here.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.