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AAPL's Decline And Intelectual Honesty

|Includes:Apple Inc. (AAPL)

Apple, Inc. (NASDAQ:AAPL) is in correction. Everyone knows that. It's like the anti-bubble; Even the taxi driver knows not to own AAPL and if shorting stocks were easy, your grandmother would be short AAPL.

It seems to be the popular pastime to blame Tim Cook for this decline in stock price (See: "Tim Cook: The (Negative) $250,000,000 Man" for one example.) Pundits and individuals everywhere seem to want to blame Tim Cook for the decline in AAPL's shareprice. In part, I think people know it's not really Tim's fault, they are just upset over his silence on the matter (which is a problem, don't get me wrong). Where were these people on the way up though? Mr. Cook seems to have a thankless job. The stock roars from $400 to $700, analysts everywhere were calling for the shareprice to reach $1000, all while Tim Cook was captain of the ship (NYSE:CEO).

Tim Cook became CEO on August 24, 2011. Steve Jobs died October 5, 2011. The insane ascent did not begin until January 2012. See the chart below for visualization. Tim Cook's inauguration as CEO marked with the green arrow, Steve Job's death marked with red.

My first point is this: If you're going to blame the man for the decline, blame him for the ascent as well. The stock price is back near where he took over. Just as an aside: people were calling for an AAPL top where those arrows are. I even had an island top marked on my chart back then.

So what then are we to blame for this correction crash in AAPL's shareprice? My answer: Basic market fundamentals, the laws of supply and demand, or if you prefer, the market gods.

The stock market works like every other market, on the laws of supply and demand. If everyone wants to own AAPL and few want to sell their shares, the price will go up. If everyone wants to sell AAPL and few want to buy, the price goes down. This is the reason that both technical and fundamental analysis work in the market. They are both ways of measuring the supply and demand in the market, just from two different perspectives. The fundamental analyst looks at the company's current numbers and future growth prospects and determines that the price of said company is cheap. The unstated conclusion is that if the price is cheap, more people will want to own the company as those future growth prospects are realized. A technical analyst looks at the shorter term situation and looks at the raw data of buyers and sellers of that company's stock. Using methods to analyze the supply and demand, they decide whether the demand is overtaking the supply or whether the supply is overwhelming the demand.

But what happens when everyone owns something? What happens when funds have 8% of their portfolio in a single company just because it needs to keep up with the indexes? Eventually, if everyone owns something, there is no one left to buy and the price will decline until more buyers step up. These are basic market fundamentals and these are the reason for both AAPL's ascent to $700 and the decline down to $390.

They say a picture is worth a thousand words. So I'm posting two.

The Stages of a Bubble.

That's great, Haki, but what does it mean?

I could go into detail explaining the above chart of AAPL. I could explain how the price action matches the labels, how that Hammer on the monthly chart in November was a nasty bull trap, but I won't. I will simply state that I believe that we are just entering the capitulation phase of a speculator bubble. AAPL is down over 40% from the top at $700 and in the last week it is down 10%. It has me feeling like capitulating and I got the majority of my position at 412.5 or so.

I'm not going to say how you should play this stock because who knows what the future holds or how it will play out. What I am going to say is that I believe the above scenario is likely. I believe we are in capitulation and I believe we still have despair to endure. How low will the price go during this? $350, $300, $250? It's anybodies guess really. What is important is that how you play this company must match your style and you must know what you are in for.

I buy and sell positions based both on the technicals and the fundamentals. I have a stomach of steel. Sometimes I endure a position going down 50% before it rises 50% from the place I bought it (see HPQ, I got in at 17, it went down to $11 or so, then up to $24). I am prepared, then, for AAPL to decline to $300 during the despair phase because I believe I am in at a good valuation. Don't get me wrong, I'll likely hedge against the earnings event on Tuesday just because I can see that being a catalyst for despair or true capitulation. However, I believe that AAPL will eventually return to the mean, and so, I bought when I could into the fear. Did I buy the bottom, highly doubtful. Did I buy AAPL at a good value and a decent technical level?

I believe so.

Disclosure: I am long AAPL, HPQ.

Additional disclosure: I am a trader, I am long and short many names not discussed in the article and have many timelines for investment horizons. I may buy or sell AAPL or AAPL derivatives at any point in the future including within 72 hours. Always consult your financial advisor before making any investment decisions. Consult your dietitian concerning any stomach cramps or indigestion. And brush your teeth before going to sleep. And whatever you do, don't sue the author. He accepts no responsibility for your actions and makes no recommendations on investment, divestment, or any sort of vestment concerning any stock or derivative mentioned in the article. Please invest responsibly and don't drink and drive.

Stocks: AAPL