Why It's Time To Short Apple

Mar. 16, 2012 2:14 AM ETApple Inc. (AAPL)145 Comments
John Tobey, CFA profile picture
John Tobey, CFA

ClockApple (NASDAQ:AAPL) did it. It hit $600. Next stop $750, on the way to $1,000 - $1,500.

Apple is officially in runaway, fad mode. Where it stops, who knows? But there are two strong reasons to believe the run is over. The first is what's happening below the surface: Weak buying and potential selling (as yet, unleashed). The second is a mind-boggling graph showing that Apple sits atop the same peak as the Nasdaq did on March 15, 2000.

First, the forces at work and the selling ready to be unleashed

Barring a news event, AAPL now depends on three forces: (1) Investor-buyers willing to pay ever-higher prices; (2) Investor-sellers holding off on taking their profits; and (3) Short-term traders, waiting to play the short side when the time is right.

Investor-buyers - In a high-speed uptrend like we have now, buyers are often referred to as greater fools. They are the ones willing to buy because the price is higher (an upside-down demand curve). Eventually, these buyers run out money or nerve.

Investor-sellers - Committed to Apple (the company), shareholders can be slower to sell because there isn't any worrisome news, except that the price has risen abnormally fast.

Traders - Institutional and individual traders know that the easiest path for a stock to take is the one it is already following. However, they can also spot an overdone trend. That's when they have a finger poised over the "sell" button, looking for any hint of weakness.

It's this last group that are the real killers of an overwrought uptrend. When Apple (the stock) inevitably shows a weakness, they will quickly sell any long positions and happily short the stock. Low P/E? iTV coming this fall? Jobs' list of magical products? They don't care. It's the stock's action now that they focus on, and they know that AAPL's run-up without

This article was written by

John Tobey, CFA profile picture
I am the founder and editor of Investment Directions. My career has been managing and consulting to multi-billion dollar funds. Using the widely accepted “multi-manager” approach, I have worked with top investment managers throughout the country, gaining a high level of expertise. My career has spanned many market environments, and I have hands-on experience searching out opportunities and avoiding risks in all of them. I now devote my time to Investment Directions, with the goal of helping investors further their understanding and improve their investing skills. I am currently serving on: The AAUW Investment Advisers Committee and The City of Vista Investment Advisory Committee.

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