APPLE DEBACLE, WHAT CAN BE LEARNED FROM IT?
It is always easy after the fact to say "see I told you so." The people that are doing that with Apple are probably those that missed the huge run up and feel this is their redemption. How could we have reasonably seen this coming? The best big picture tools for determining when something is completely unsustainable in my opinion are Standard Deviations. There are all sorts of way of concocting them to display on your screen. I don't believe there is any magic setting to use, it is a judgement call.
In this case you can see we cleared the band on the high side and stayed above for about a month, then wham the reversion started. One thing to keep in mind with this is that this company is not broken, they have $137 Billion in cash ( no typo ). They have revolutionized a segment of tech and are still the leader. There are competitors closing in on them, which always happens when you are the leader of anything. There are "experts" talking about the valuation still being cheap. I always want to see account statements or some proof that these experts are profitable traders, which never seems to be available. I think using earnings valuations is dangerous, you can engineer them to fit your bias.
This is an example of why trading the story is a big mistake to make. How do you determine with any reasonable degree of accuracy, when the story is no longer any good? It is impossible unless you just want to rely on being lucky or always being the smartest guy in the room. If that is your approach you had better be the one, since only one person can be right or lucky. I prefer more mechanical approaches. I thought the Apple story was tired long before the top so I would have been way early on this one had I approached things on that basis.
One thing I was obsessed with when I began studying the markets 30 years ago was picking tops and bottoms. Your eye gets drawn to them when looking back in time. When you look at this chart the top just jumps out at you now that we know what happened. Even after 30 years if I tried to pick tops and bottoms with all that I have learned, I would not be successful. The best approach is to monitor when something gets extended, then once it turns play the first retracement. In this case it took place mid October. It is true chicks at cocktail parties may not remember you called the exact high, but your bank account will be more attractive to them which is really the point anyway of being a braggert.
The reverse logic now is in place. The price is over done to the down side now as per the bands, so a possible turn back up could be in the works. There is no hint of it yet, but once it breaks back upward a first retracement pull back entry will likely develop. What is disconcerting about this is that it has occurred in the midst of a monster overall stock market rally. I don't like trading against the big picture tide in general, so I am not sure about the long that should be coming in the next few months. It could occur during an overall market decline, but there is plenty of time to worry about that.
What can be learned from this is that once a price gets this over extended in either direction, the story is irrelevant, mathematics will take over. This is how I timed the Real Estate and Stock Market tops in the past, using these types of tools. Real Estate is less liquid so I did try to pick the high and was the smartest guy in the room at that time, and also lucky I got it so precisely. However, I don't want to depend on that combination always being the case, it won't be.
You could say Natural Gas is in this type of situation after years of being beaten to death is far over due for a price rally. The Stock Market could also be in danger of setting up something like this the way it is rallying.
The best comedic analysis of the Apple decline cited it as the reason to blame for Gold going down the last few days. We have been short Gold in the Swing Service for the last couple of days and it is funny, it had nothing to do with Apple. Lets examine this for a second. First, the 200 day Moving Average is what most large funds focus on. This stock has been under that for quite some time now, yet it was just the last two days that caused the selling? Of all the other days during this huge decline where this alleged relationship should have shown itself it did no such thing. Now all of the sudden someone who is a gold bull and refuses to see the clear down trend in Gold, blames the drop of the last 2 days on a stock. How people come up with this garbage is beyond me but it also should make it easier for us since we can do the opposite of what they write and generally prosper. I say keep it coming!
Enjoy your weekend