Apple Earnings: A Classic Case Of 'Buy The Rumor, Sell The News'

| About: Apple Inc. (AAPL)
This article is now exclusive for PRO subscribers.

The "buy the rumor, sell the news" phenomenon occurs all the time in the markets today. Investors by up stocks based on what they believe will happen in a given earnings report, economic event or new product release (the rumor). After the event transpires or the report is released (the news), they dump their positions and the stock moves lower. These buy the rumor sell the news spectacles often apply to things like new products being announced. It seems Apple (NASDAQ:AAPL) may be experiencing this effect as we speak.

What happens is the stock rallies hard into earnings. The rally occurs because investors, emboldened by the rumors their favorite stock -- Apple in this case -- is going to hit it out of the park in regards to exceeding earnings estimates and has new products on the horizon that are a sure thing to be successful and are revolutionary. The buying prior to the earnings announcement runs the stock up to all-times highs, leaving it vulnerable to profit-taking once the actual earnings are reported.

Now, this is only one of three possible scenarios, although it is the most likely outcome. A second occurrence, which has an even more devastating outcome, is the earnings announcement is not impressive and the short-term investors in the stock for a quick buck bail immediately, along with long-term investors who are devastated by the debacle. The third outcome is the earnings and products released are colossal hits out of the ballpark, propelling the stock even higher, the rarest of outcomes.

Let's review Apple's current action and investor activity to determine if Apple may fit into this scenario. First, is Apple's stock running up significant gains into earnings based on positive news hype? In a word, yes. Apple recently touched a new all-time high just yesterday of $427 per share and has risen over 10% in the last month going from $383 to $422 a share as of today. Please review the following charts displaying these statistics:

Chart provided by Yahoo Finance.

Recently I wrote an article where I described the recent move in Apple's stock as parabolic, and took a pretty good shellacking from the Apple army. Well, if the chart above does not look parabolic to you, you may need glasses. I am not going to repeat the entire diatribe, but to make it short and sweet, parabolic moves are inherently unsustainable.

One-Month Chart

Chart provided by

The above chart displays the 10% move in Apple's stocks leading up to earnings. The "buy the rumor" portion of my thesis is proven. There is no disputing investors are champing at the bit to get in to the stock prior to the announcement. The fervor regarding the potential blowout quarter is causing people to foam at the mouth. There is virtually no one taking a negative slant regarding Apple today, and if you even suggest there may be things to consider, you are essentially ridiculed incessantly and called a fool. This actually underpins the theory. Rational debate regarding Apple's possibilities is no longer possible.

The first part of the premise has already been revealed as true, people are definitely buying on the rumor. I'll be waiting on pins and needles to see if they sell on the news. Hopefully they won't, and current Apple shareholders will be justly rewarded.

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