Upfront conclusion: No threat seen, but not much contribution likely for determined wealth-builders.
It isn't easy, being big
Especially when you're a part of an Index constructed differently than all the others, and being part of the others too. Apple, Inc. (NASDAQ:AAPL) is a member of the Dow Jones 30, the S&P 500, and the Nasdaq 100.
AAPL's role in the overall markets picture should not be ignored. Here is a 3-month comparison with the index-tracking ETFs of the three major market measures.
That perspective of the recent past contrasts with a perspective of the near future, as seen by Market-Makers [MMs] playing their parts as facilitators in balancing buyers and sellers as their big-money clients adjust holdings in billion-dollar portfolios.
(used with permission)
This map relates the upside price change prospects for each of the stocks in the blue field at right, with their actual worst-case price drawdowns experienced following forecasts like those of this day. Upside prospects on the green horizontal scale, downside experiences on the red vertical scale. Several stocks are at the same numbered locations.
Trading $100-million holdings in a single-priced "block" transaction is like shooting a cannon: It can't be done quietly.
At least, not in today's automated, instantaneous, high-frequency-exchange environments. But for big-value portfolios, that scale is what is required to make a difference. And "regular way" trades in relatively tiny volumes would instantly move prices against the MMs' clients.
So such block trades, the way W. Buffett expanded his holdings, get negotiated in private, off the public exchanges, between other big player-funds and institutions, with the MMs usually putting firm capital at risk to bring buyers and sellers to a balance. Then the trade can be announced to the public on an appropriate exchange.
The participation by MMs as temporary principals is where the upside forecasts in Figure 1 come from. They only have just so much capital, and lest it be fully committed quickly, they hedge all such commitments, transferring the risk of unwanted, damaging market price changes to organizations of speculators paid to take such risks. Then that capital can be reused for additional market-making.
The negotiations in how those protections are structured and priced contain the expectations of the buyers and sellers for coming prices of the subject of the block trade.
Which brings us back to what Figure 2 shows about AAPL at location .
In risk~reward terms, AAPL in the DJIA crowd is an outlier.
That doesn't make it an overpriced problem, a risk. It doesn't portend plummeting prices and a need to flee.
But it does say that other issues in the 30 are likely to be better places to put new or additional available capital in anticipation of the coming few months. Perhaps even lightening up some AAPL-gains capital for reinvestment elsewhere.
And that observation should make clear that our focus is on active investing, rather than passive strategy. Buy&holders are welcome to read on here, but they may find more satisfying copy elsewhere than in what is coming: Reinforcing evidences that AAPL is likely to be "at rest" for a while, after using up some price acceleration reserves in the recent past.
That evidence is to be found in Figure 3, and Figures 4 and 5 afterwards.
(used with permission)
This IS NOT a conventional backward-looking "stock chart" of past prices. It has a 6-month look back of prior forward-looking price forecasts for AAPL, each made daily as a result of the MM activities previously described.
Each vertical line is the range of price held (at that point in time) to be likely enough to occur in the next 3-4 months to warrant the MM paying to protect against its happening at its extremes. The range reflects both buyer and seller of protection concerns. The heavy dot in each vertical line marks the market quote at the time of the range forecast.
It turns out that the upside and downside prospective price change proportions have some predictive value. To measure those proportions we have the Range Index [RI] which tells the percentage of the whole range that lies below the market quote at the time of the forecast. Got it? Low RI = large upside potential, High RI = potential large drawdown exposure.
A useful measure, the RI. About as useful as the P/E, where not all stocks are cheap at a 12 P/E and expensive at a 18 P/E. Neither are there rigid norms for RIs. Each stock or ETF tends to have its own history, and it is useful to know how market prices have behaved following that array of RIs.
Which is exactly what is shown, in detail, in Figure 4.
This table in its central blue row shows how AAPL's price has changed, in CAGR terms, following all 1256 daily forecasts of the last 5 years. The subsequent changes are measured in 1 week, 5 market day cumulative increments, out to 16 weeks, or almost four months. In rows above that row, forecasts of RIs closer to the 50-50 balance of the 1 : 1 reward-to-risk row have been eliminated progressively until the top row shows the price change results of only those forecasts with zero or negative (price below the range bottom) RIs.
The magenta 545-forecast row of 5 : 1 is where the current RI of 15 (85 up to 15 down = 6:1) is placed. The count of 545 includes all the forecasts of the rows above the 5:1 row. The noted sample in Figure 3 of 124 RIs at 15 is more specific to what actually happened to AAPL prices at only this day's current RI level of 15.
But the Figure 4 table clearly shows that AAPL RIs above 6 (94 up, 6 down = 16:1) show a sharp drop-off of the fat double-digit gains enjoyed by the 15 : 1 (RI 4 or less) set of 226 forecast days.
Now 226 days are one out of every 6 days in the last 5 years, so they are not a rare occurrence - almost once a week. It's just that RI level is not where we are now, and it may take some significant changes in either price or higher expectations to get us there.
What is this investing game all about?
The game is about many objectives, including protecting capital against loss and keeping its purchasing power. Those principal goals are sacrosanct for many well-fixed investors.
But far many more are eager to get to that state of affairs, and they see equity investing as a good and possible way to build one's financial resources. A good (bad) number of them are confronted with little time to do it in - the career version of too much month at the end of the money.
That problem can only be met by accelerating the rate of capital accumulation, and neither frugal spending nor determined dividend seeking is likely to achieve what is needed. Now it is time to go back to that row of data in Figure 3.
There the MM forecast of a price target to be protected against when a MM is short AAPL stock is $156.80, +12.2% above the $139.78 price at the time of the forecast. It sounds dandy, if it can be achieved. But how often has it been reached in the past?
AAPL now has this 15 RI forecast, and has seen it 124 times in the past 5 years, or 10% of the time, once every other week. Although it has appeared not spread out that way like creamy peanut butter on toast. More like chunky.
And the odds of each next 3 months either getting to a price gain like today's +12.2% forecast, or even getting to any price at the end of 3 months above the market quote at the time of the forecast, have been only 46 out of each 100.
That's not even a fair coin-flip. And the average accomplished payoff was actually negative, a -1.5% total outcome on the 124 prior RI 15s. Credibility of the +12.2% is not encouraging. Maybe one of the every other week's buys will add to your portfolio's value, but the other one will leave your monthly statement a bit lower.
That's no way to build wealth, so AAPL at the present does not seem like a good alternative. Where may there be better ones? Let's look at Figure 2.
IBM shows an upside a bit better than AAPL's +12%, perhaps +13% to 14%. And its prior price drawdown experiences have been less expensive than AAPL, maybe -6% instead of -12%. So looking at our soon to be published IBM article on SA may be a good idea.
And regular daily reviews of MM implied forecasts, with examinations of their RI histories, may give further useful perspective. Here in Figure 5 are averages of the ~2500 other issues in the forecast population, and of the 20 best-ranked ones:
The whole forecast population currently has an average Range Index of 31,slightly better than 33, which implies twice as much upside as downside. Its shape looks like this:
Rather few issues have RIs of over 50, with larger downsides than up. The market at large is not seen by professionals as being dangerously priced at this point.
The population's Win Odds at this forecast level has been 62 of 100 or 5 profitable buys out of 8, and its annual rate of return from prior current-level forecasts would be 2.9% in average holding periods of about 9 weeks, or a CAGR of +17%.
The best-ranked 20 out of that population has had 9 out of every 11 prior forecasts like today's produce gains substantially larger than their nearly +10% suggestion average on all 180 (x20) prior forecasts. Doing that in just 8 weeks on average produces a CAGR of just over 100%.
That is what the current best 20 has done, not a promise that it is what they will do in the next 3 months. But the forecasts were made by the same forecasters, in the same process that has been used daily over the past 5 years+, and there were 3600 examples drawn from to get those averages.
AAPL stock may be looking for a rest, after some energetic recent gains. Several other issues are known to be currently available that may comfortably produce more reliable, larger annual rates of gain than can be inferred from the market-making community's current self-protective behavior.
But there is no sign of threat that would support disturbing AAPL positions not being looked to for active capital gains.
Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors and now individual investors, discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.
We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided. Our website, blockdesk.com has further information.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.