Flash Crash Signals Fraud In The Market For Apple Shares

| About: Apple Inc. (AAPL)

The flash crash in Apple (NASDAQ:AAPL) this past Friday (March 23, 2012) is a significant event that signals fraud and excessive speculation in the stock, and reinforces the thesis that a bubble in Apple is quickly developing.

First, let us note that Friday's flash crash is not the first one that Apple's shares have experienced. Below is a list of some of the others that have been documented and the dates they occurred.

So that means there have been at least four flash crashes in Apple in the past 18 months, with two occurring in the month of March 2012. I think this is just a symptom of high frequency trading and the distorted, fragmented market structure it operates in. This analysis of the 2010 flash crash by Nanex is worth revisiting for a deeper look into the subject, but the basic story is that an honest auction structure in the market is increasingly not in place. Quote stuffing -- the practice of putting in a bunch of orders that are not authentic and will get pulled -- is wreaking havoc, and creating flash crashes.

The rise in frequency of flash crashes in Apple runs alongside with an increase in the stock's implied volatility. This article by Seeking Alpha contributor Kim Klaiman is an especially insightful and worthwhile read on the subject.

The increase in flash crashes and implied volatility suggests that high frequency trading is rampant and creating a real problem in terms of honest and legitimate price discovery in the market for Apple shares. Expansion of the money and credit supply, fraud, and rapid price appreciation are all hallmarks of a bubble. Apple shareholders, be wary.

This situation in Apple reminds me quite a bit of what we saw last year in the market for silver (NYSEARCA:SLV). Silver moved 81% in a period of three months in early 2011, and just before it collapsed, it had an especialy volatile day where the price range was over 8.5%. The chart below illustrates.

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Monetary policy was inflationary in 2011, which helped create a silver bubble (as well as civil unrest in Arab countries as inflation was exported). Monetary policy remains aggressively inflationary in 2012, ready to create a bubble -- or perhaps multiple bubbles -- somewhere.

Moreover, price has been gently floating upwards in the $600 area on low volume. This could be a topping formation -- the distribution phase, to use technical analysis lingo. Yes, I've called this before -- and was wrong -- but as any speculator can tell you, speculation is a game of probability and risk management; it is not about finding the holy grail and being correct 100% of the time. If I take a short position here, I'll have my stop loss at $620.

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Those who are bullish on equities due to macroeconomic conditions (as I am) could couple a short position in Apple with a long position in Amazon (NASDAQ:AMZN). Competition in the technology segment is all about who can create the best platform -- meaning the best service to connect you with merchants, media, software, and other people. I suspect we will see many platforms -- each excelling at enabling a specific type of connection -- but I think Amazon is remarkably well positioned here, and that their position will only improve relative to Apple because of their ability to compete on cost and scale.

And because I favor investing in people more than anything else when it comes to stocks, I think it is crucial to note the Bezos factor: I don't think there is a better technology executive in America, and possibly the world, at the current time than Amazon founder and CEO Jeff Bezos.

The chart below also illustrates how the spread between Apple and Amazon has widened as the Apple bubble has kicked into high gear. In light of the topping formation in Apple and how wide the spread between Amazon and Apple currently is, I think there is an opportunity to speculate upon a tightening of the spread.

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This coming week has potential to be very interesting. For those who prefer to play stocks from the long side -- and I certainly put myself in that category -- the collapse of the Apple bubble will likely lead to an excessive correction to the downside, which could open up opportunities for buyers with patience and the conviction to buy extreme sell offs.

Disclosure: I am long physical silver and silver derivative contracts.