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I believe a bubble is clearly forming in Apple (NASDAQ:AAPL). In this post we'll take a look at the supporting arguments for this thesis, as well as some hypotheses as to how price may behave in the future.

1. First off, and most importantly, is the notion that the macroeconomic environment is one in which monetary policy is likely to fuel a bubble somewhere -- perhaps even in multiple sectors. Money supply continues to soar to new all-time highs, and low interest rates make equities an appealing option relative to bonds. I previously listed seven areas where I thought a bubble could emerge (these six plus graphite) and now I'd like to add one more: Apple.

2. We've seen a sharp increase in the share price of Apple. Apple is up over 40% in two and half months. If this rate is sustained over the next three and half months, Apple's share price will have doubled within 6 months. This is simply unsustainable; regardless of how great a company may be, big markets do not move in a straight line. True bull markets grow slowly with little attention and fanfare; sharp price acceleration is unsustainable, and marks a bubble characterized onset of untrained speculators. And while Apple does have robust earnings, its P/E ratio is growing, and currently sits at 16.68. The higher the P/E ratio goes, the more the market is assuming higher earnings into the future.

This type of growth is difficult for any company, but especially difficult for a company with a market capitalization as high as Apple's. Moreover, the company has lost its most important employee-- founder Steve Jobs. While Apple does have a couple years worth of products in the pipeline, the higher the P/E goes, the more we are assuming new product revenue can be sustained beyond what's in the pipeline. As Jobs is no longer with us, I find this assumption to be far from certain.

3. Another telltale sign of a bubble is the onset of speculation. We saw this back in the late 90s with day traders and Internet stocks, and then again in the housing bubble with those who quickly bought and sold properties. In the case of Apple, we are starting to see a CFD market emerge for the company. CFDs do not entitle their holders to any actual ownership of Apple shares-- rather they are simply a derivative that enables individuals to speculate upon Apple's share price. As such, the CFD market is basically the same as a market made by a bookie; it is an entirely speculative market. CFD markets are characterized by high leverage, and CFD brokers often offset their speculative orders in the real market. The stage is thus set for speculators to easily enter the market for Apple, and for CFD trading to be offset in the real shares market -- which would have the effect of pushing Apple's price even higher.

4. Last, but certainly not least, is sentiment-- the hype surrounding Apple is approaching unreal proportions. I got a first hand taste of this in my previous commentary on Apple, in which I suspected the market was due for an imminent pullback before heading much higher. This analysis turned out out to be wrong -- Apple did not really experience a pullback. But based on the majority of comments on the article, you would have assumed I said the company was terrible and its shareholders were evil people with unloving mothers. This type of irrational, emotional response from shareholders, coupled with the mainstream media hype, suggest the possibility of extreme sentiment. For contrarians, this presents an opportunity.

Ultimately, every bubble is built on a false dream wrapped around a kernel of truth. In the case of Apple, the truth is that the company is an earnings juggernaut; with 24%+ operating margins and an EPS greater than $35, this is impossible to deny. The false dream is that this can go on forever, that Apple's high-priced products can find a sufficiently large customer base in a world with no savings and unbearable debt burdens, and that Amazon (NASDAQ:AMZN), Samsung, HTC, and Google (NASDAQ:GOOG) cannot collectively undermine Apple-- or at least slow down its growth. The threat of competition is especially formidable if Apple cannot continually put out new products that give the company first mover advantage in new markets. For this reason, a full Apple TV is an especially important development to watch, as I previously noted.

So, what's the right way to play this? Well, if you're in Apple, I would favor selling partially on signs of a reversal on the daily chart. Of course, if you have already reaped 100% gains or more, I think it may be worth taking your original capital off the table, and deploy it to more underpriced opportunities.

If you, like me, have missed out on the opportunity of the past decade and are not in Apple, I think the best opportunities now come from taking short opportunities. Parabolic markets rarely, if ever, end well -- and I doubt Apple will be any different. Of course, bubbles can go on for a long time, so shorting does need to be done carefully. I favor waiting for technical signs, and maintaining stop losses and taking small losses if the market does not quickly go in your favor. Bubbles are speculative markets and require the mindset and techniques of a speculator.

If you're outside the U.S., and if you're trained in technical analysis, the CFD market for shorting Apple may offer some truly outstanding opportunities. It is something I'm personally keeping an eye out for. Specifically, if Apple can reach $823 or higher by the end of June or sooner, it will have doubled in price within 6 months. At that point, I think focusing on opportunities to short will be especially worthwhile, and that numerous high risk/reward setups will be available because markets simply cannot sustain that type of appreciation without a significant pullback.

Lastly, here is a current chart of Apple, with my technical comments imposed.

Click to enlarge

Source: An Apple Bubble Is Forming