Is Apple's Stock Manipulated?

May.21.12 | About: Apple Inc. (AAPL)

In one of my previous articles, I argued that Apple (NASDAQ:AAPL) might have become a speculative stock. I have been warning for a while that the stock has gone up too far too fast. When the stock was going up almost every day for no visible reason, I asked a simple question: what do we know today that we didn't know a month ago?

Some people would argue that funds were buying the stock in anticipation of the dividend. That argument simply doesn't hold. A $10 yearly dividend means nothing for a stock that can move that much in a matter of minutes. Are you telling me that the stock rallied $130 in one month in anticipation of a $10 dividend?

Today after the stock is down from $644 to $530, I must ask the same question: what do we know today that we didn't know a month ago that caused the stock to lose $120 Billion of its market cap? The obvious answer is: speculation.

When the stock is going down now almost every day, many Apple bulls would argue that the stock is manipulated. It is interesting that they didn't think it is manipulated when it was going up at the same speed. The simple question is: how can someone manipulate a $600 Billion stock?

So what lessons we can learn from the Apple dramatic climb and equally dramatic decline?

I think the obvious answer is that Apple is a unique company but AAPL is not a unique stock. It is not different from any other stock and follows the same stock market rules. What goes up will eventually go down. When the stock is so overbought (RSI was above 85 for weeks), it was only matter of time till the inevitable correction.

People who dismiss the technical analysis and concentrate on the fundamentals only, might want to reconsider their investment philosophy. Technical analysis has its place, and AAPL chart can provide a lot of useful information.

It is also obvious that AAPL is not immune to the general market conditions like many would like to think. During the 2008 crisis, the stock was down 60%. With the current beta of 1.25, if the correction continues, AAPL will not just follow; it will probably lead the correction. If the markets go down another 5-7%, I wouldn't be surprised to see AAPL at $450-470.

Unfortunately, in most cases of parabolic moves, those who join the party late buy the shares of those informed traders and investors who have already made significant gains and are ready to move to the next target. When they decide to sell part of their remaining portfolio, then the late comers, who are usually weak hands, panic and try to sell at break-even or just below that.

The recent pullback also shows the dangers of over-concentrated portfolio. Many people went "all in" with Apple thinking that the stock will just continue going up $100 month after month. Obviously they were proven wrong. No stock deserves more than 25-30% of your portfolio, and AAPL is no different.

So what's next?

Like Stephen Rosenman has mentioned, the Relative Strength Index (RSI) for the stock dropped to 30. This indicates oversold territory. Of course, the stock was overbought (above 70) for a long time and the rally continued. The same can happen here - the stock can remain oversold and still go lower, especially if the market correction continues. However, at this point, if the history has any meaning, the bottom might be close.

Honestly, I have no idea which way the stock is headed. Personally, I don't really care. I didn't buy the stock when it was at $644 and I don't buy at $530. Instead I'm playing it with the options non-directional strategies. I shared quite a few Apple trades with my readers. Here is the full list:

  • The Bull Credit spread from December 13, 2011 produced a 42% gain in 6 weeks.
  • The Iron Condor from January 10, 2012 produced a 28% gain in 2 weeks.
  • The Bear Call Spread combined with the weekly RICs from February 14, 2012 produced a 15% gain in 5 weeks.
  • The Iron Condor from March 5, 2012 produced a 18% gain in one week.
  • The Long Butterfly from March 19, 2012 produced a 35% gain in three days.

Those trades show you how you can make money no matter which direction the stock goes. Why to be dependant on the market? Learn to use options to profit in any market.

One possible trade can be weekly Reverse Iron Condor combined with longer term Iron Condor. The idea is to take advantage of the short term volatility and at the same time getting the premium from the longer time trades. You can make big money by understanding the Implied Volatility and lose big money by ignoring it. You don't have to predict what the stock will do next to make money in the stock market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.