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In my article Why I Wouldn't Trade Apple Right Now, I argued that Apple (AAPL) has gone up too far too fast with no visible reason or significant news. The article provoked a very healthy and long discussion. Unlike many other public forums and discussion boards, the discussion was very civilized and intelligent. This is the power and the beauty of the Seeking Alpha community.

Last week, I came across an SFO Weekly Column by Jeff Augen, a well known private investor, educator and author of several investment books. In his column "Apple and a New Bubble" (free subscription is required), Jeff argues that:

"Investors must find a way to rationalize market cap growth of more than $100 billion in a single month when the only significant news that surfaced was the launch of the much anticipated new iPad."

This is in line with my own observations. Looking at the options behavior confirms the bubble thesis. As Jeff mentions:

"Apple's intraday volatility can be considered to be 85% greater than Google's with options trading at the same implied volatility. This kind of unstable behavior is characteristic of a bubble."

Here are few additional things to consider:

  1. Apple's value is now more than 4% of the U.S. GDP.
  2. Options Implied Volatility jumped from 19% to 41% in a matter of few weeks with no significant news.
  3. You could make almost 50% in one week trading a delta neutral butterfly spread. Those returns are possible only with highly speculative stocks.
  4. Pretty much everyone is now bullish on Apple. If everyone is bullish and already has purchased the stock, who is left to support further stock increase?
  5. The market is pricing the good news only and ignoring all the bad news.
  6. According to Forbes, some of Apple's insiders dump the stock.

The Forbes article is especially interesting. The columnist argues that:

"Apple cultists may want to take notice that the top brass of Apple clearly does not believe that Apple stock going to $1000 is a sure thing. Blind faith is the hallmark of cultists. "

It also quotes an email from an Apple's cultist:

"You are wasting your time here……. Other analysts on AAPL are all silly? You are smarter? A nuclear physicist, so what? Apple will be above $1000 soon, no matter what you said……. You took profit at $360 and $525, shame on you."

Please note the definitiveness of Apple going to $1000 in the above excerpt.

I see the same types of comments in many Seeking Alpha articles. When people make those kinds of definitive claims and start telling you how they made tens of thousands of dollars in Apple stock in a matter of few weeks, it smells danger to me.

It seems that Apple fans simply don't want to hear any kind of even slightly negative news about the company and the stock. The new iPad gets up to 13 degrees hotter than the iPad 2? Apple response: "If customers have any concerns they should contact AppleCare. (Translation: Chill out!)."

The new iPad is not compatible with 4G networks in Australia, Europe, and the Middle East? Most Apple fans didn't seem to know or care - they just wanted the new iPad and were ready to spend few hours in line to get it. The stock response for all those news was positive, any bad news simply had no impact.

Some people would argue that the stock will get more support from dividend funds that were restricted to own it till now. I personally doubt it. The stock often moves up and down more than the entire year's dividend in just a few minutes. Most of the dividend funds don't want to own that kind of volatility.

As an options trader, I'm always looking for a new ways to benefit from any situation. But there is no easy trade here. Jeff Augen agrees:

"There is no reliable fundamental analysis for Apple because nobody has a financial model to describe the largest market cap on earth for a company that produces electronics products. They have too many competitors in too many businesses to even count. Gambling on something that trades at a market cap 40% larger than Exxon Mobile is quite risky unless you have a serious reason and real detailed knowledge of the company. So I'd rather just bet on the volatility and watch the stock pickers gamble from a safe distance."

Jeff mentions few trades involving long-term options (LEAPS). Unfortunately, those trades have very heavy margin requirements and are probably not suitable for most retail investors. So for me, still no Apple trades at this point.

Jeff's views on the stock confirmed that I'm not completely out of line. When someone like Jeff Augen says that "this kind of unstable behavior is characteristic of a bubble", it is probably not a good idea to ignore his opinion.

Source: Has Apple Become A Speculative Stock?