Apple's (AAPL) price has recently softened, and many are now saying that the stock has topped. In this article, I wanted to compare Apple to two previous parabolic ascents - silver in 2011 and the Nasdaq in 2000. I will be using ETFs, iShares Silver Trust (SLV) and PowerShares QQQ Trust, Series1 (QQQ).
Although each of these instances came in unique market circumstances with their own fundamentals driving the move higher, there certainly are commonalities in the emotional trajectory of investors.
In writing this article, I studied many of these climax moves and was amazed at the similar paths, the price path up and down. Originally, I wanted to compare Apple to all of these bull market climaxes, however it quickly became redundant and I decided to focus on these two, recent examples.
I chose silver, specifically because it is the most recent example of a climax top, and the emotional arc is fresh in our memories. It also provides a stark contrast with its top and subsequent rapid, breakdown vs. Apple's recent top and subsequent healthy price action.
I felt the Nasdaq was an apt comparison because of its long bull market and price appreciation prior to its climax is similar to Apple's. Apple in nine years has gained almost 8000% from $7 to today's price of $560. The Nasdaq, from the beginning of its bull market in 1982 to its climax top in 2000, gained 3,044%. One of the observations I made is that the longer the bull market, the more extreme the climax.
As impressive as this move higher has been for Apple, it's not consistent with previous parabolic moves and specifically emotional extremes reached at ultimate tops. Especially, when we compare it to long running, decade long bull markets like the Nasdaq in 2000.
These types of parabolic moves end with buying exhaustion. Everyone has bought and all doubters have been extinguished. The analogy used by Justin Mamis in The Nature of Risk is of everyone being on the same side of the boat.
Based on a study of these parabolic moves, it seems early to declare that Apple has topped.
Key Take Aways (from all climax tops)
- The intensity and ascent of the climax top was correlated to the length of the bull market.
- Once it topped, almost the entire gains of the last leg up are wiped out. Many buyers are trapped at the top.
- Fundamentals cease to matter as price begins going up, just because it is going up.
- The steep fall from the high is a result of buying exhaustion, as there is no sideline money to support the price
- There is a huge surge of volume as we top, and on the way down.
While Apple was certainly overbought in early April and there was a lot of hype in the mainstream media surrounding it, I think the lack of free fall is proof that there are still buyers on the sidelines willing to support the price.
Many traders make the case that because of the hype surrounding Apple, it is proof that Apple has topped. However, I think this is confusing causality and correlations. At the top, there will be lots of hype around Apple, just because there is lots of hype around Apple does not mean it is a top. Make sense?
The Apple chart, compared to silver and Nasdaq, is the strongest piece of evidence refuting the claim that the top is in. We have a nice orderly move lower, rather than a plunge from new highs, this type of action is more similar to an asset in a bull market taking a breather, as shares move from weak, momentum chasing hands to strong hands.
Further, the volume picture differs as there was no significant surge of volume accompanying the recent high around 630 nor on the way down. In bull market climaxes, absurdly huge amount of issues trade hands, as greed becomes the dominant emotion.
Like every asset in a strong bull market, Apple will have a climax top, however based on precedent, we haven't seen it yet. Rather than a top, this feels like a consolidation of the move higher.
There is also the valuation argument, which deserves its own future article. I will compare the sky high valuations, indicating excessive optimism about the future at climax highs vs. Apple's valuations today.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.