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Zach Bass (a.k.a Ernie Varitimos) is Chief Bloviator of Investor in the Wilderness. He has 30 years experience as a Tech Maven, Investor and Consultant. Zach has been using Macs since their introduction in 1984, and investing in the markets just as long. His mission is to help guide all level of investors through the Apple Ecosphere and make sense of the markets. Zach's take on Apple, the markets, and life pursuits, will keep your mind tuned.

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Apple Investors Were Pinned Then Screwed

July 19th, 2008 • Related • Filed Under
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Yesterday I talked about Max Pain and Option Pinning. These are well known phenomena in the investment world and yesterday these concepts were displayed in textbook fashion with AAPL. But it went beyond that. Apple investors are getting screwed by the will of big money and hedge funds. But I’m getting ahead of myself.

For the novice investor or trader, they would have looked at yesterdays action with naive objectivity and concluded that there’s rampant manipulation. While this may be true, it’s not for the reasons they might have concluded. For example, the market continues to advance on weakness in Oil and what appears to be capitulation by the Bears. This is great if you’re pent up for a rally, right? Then why isn’t Apple enjoying in the spoils?

While it’s true that the Tech Sector was held back by poor earnings and guidance from Google and Microsoft, that doesn’t seem to explain why RIMM gained in the face of a downgrade. And it certainly doesn’t explain why Apple declined in the shadow of consumers literally lining up to purchase Apple products out the Apple Store doors, around the corner, down the street, block after friggin block, day and night!

Sure, Apple was pinned down because Max Pain was below the current trading price, and the battle ensued while traders tried to exit their positions minimizing losses. And RIMM was lifted partly because Max Pain was above the current trading price, but weren’t they also downgraded. I though downgrades in Bear markets are like the death bell. But then I look across at Financials, they’ve been falling off the cliff, yet today they’re up HUGE! So, I guess all that theory of pain, pinning and bear markets just goes out the window.

So, what is it that really moves the markets? I guess in the long term fundamentals do win out. But only during Bull markets. In Bear markets, all the nefarious doers, hedgies and unscrupulous money baggers come out from the underworld of the markets.

 

 

Click to enlarge: This is the intra-day chart of AAPL on Friday June 18, Options Expiration Day. May Pain was $165. I have outlined the steps that the Big Boys use to put the screws to the average Joe investor. Noted the low right before the close!

What really moves the markets is the will of big money. They pick on stocks like AAPL because it has high liquidity and extreme volatility. With a stock like AAPL, they can choose a direction, up/down it makes no difference, and with a little prodding, easily move it in the desired direction. When the move gets exhausted, they move it in another direction, all the while crafting their positions to take advantage of the rest of us who get dragged along and sucked dry of our hard earned capital.

Do you want to become a better trader, cut through the froth? Then check out the Wilderness Investors Group. Click here to learn more and request membership. We have a vibrant community where you will gain valuable knowledge and insight on trading and investing in Apple.

 

More on this topic (What's this?)
The End of Steve Jobs ™ (The Curious Investor, 12/18/08)
Lower Prices, Lower Margins, Better Apple? (The Curious Investor, 7/23/08)
Sold AAPL Naked Put, Again (My Trader's Journal, 7/10/08)
Technical analysis for Apple. (StockWeb, 7/23/08)
Read more on Apple at Wikinvest

Viewing 10 Comments

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    Love your tales from the long room Zach and your vividly clear narration . I'm a long time UK Fan of Apple and erstwhile developer totally convinced about the quality and vision of apple products and service. It is extraordinary how stand out these occasions are when big capital appears to orchestrate the big downs for apple SP followed by big ups soon therafter with very little to calibrate either in terms of financial performance. I recall April 1986 very vividly and also earlier this year. It is extraordinary that regulatory authorities can't call these large shorters to explain/account for their actions. After all it's not their money they are playing with, it's that of uncle tom cobbley and all.

    In the UK, GSK also falls prey to shorters without reference to actual financial performance and though not so dramatic in effect galling nevertheless. The emphasis on Innovation is a thing both companies hold in common and I wonder whether punishing the costs of bringing truly innovative product to market is one of the things that attracts the ***** whose only expertise is working the rise and fall of lines on a graph!
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    oops meant 2006 not 1986
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    I observed the same exact process on Friday - even lost money with a buy at 166!

    It is possible they are driving the price down before earnings for the next move up.

    Armen
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    In hindsight, it seems only certain that AAPL stock price would have been driven to Max Pain. Because the big boys could. The wider the swings in stock price the more money they make as the price goes up and down, up and down. Your article hit the nail on the head. I guess that the big boys have been manipulating markets for eons, to whatever extent they can. Just look at oil. And people have been making accusations about this manipulation for eons also. Actually, from a profit-making, investing point of view, it's better for all investors to take advantage of their manipulations, and the knowledge of them, just like them making money on these manipulations, rather than trying to change this practice, which is just one act in the theater of a capitalist economy. They are just capitalizing on what they can do. Sad, but true.
    Your article is welcome, as it serves to educate other investors about this practice, and ergo, help make them more immune from losses they might have incurred had they not been aware of these manipulations.

    Well done.

    david forjan
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    If you can't beat 'em, join 'em. AAPL is close to bottoming in the range, then it'll rebound on earnings to previous top range of ~$180 -- buy Aug 8 call options and stop whining.
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    If the Deagol model is correct, AAPL closed about 7 bucks under FMV of about 172. I am guilty, as are many, of buying it at 175, 180, 185, and 187.50. As of yesterday I am also guilty of buying at 165.59 down roughly 18% from the 202 all time high. When I bought at those higher levels, I had bought into the idea that the worst of the damage has been done and that major indices were on the bull trend. Thus I was buying future earnings growth. The exponential rise in commodities and falling dollar were not a part of my assessments. At 187.50 I was buying at almost 10% over FMV. How bright was that?

    GS, among the best of the financials, is down 27.5% from 52 week high, Wachovia is down 85% from 52 week high, Lehman down 80%. Apple's competitor's by divisions...RIMM is down 25%, Dell is down 40%, MSFT is down 35%, Even the Googlesaurus is down a whopping 40%.

    My gut level is that a lot of stocks are undervalued by a lot more than 4%, and they were run down the same way but fell a lot further because of fundamentals. Our favorite Apple has kept us from real pain by consistently delivering results.

    Speculation swings to the downside as well as the upside. And when Joe Six Pack buys and sells he is also involved in setting the price point. If Joe Six pack hadn't helped overvalue it by 10%, it would have been less likely that the bigs could run it down 5%. I bought some of those puts and calls that helped set that max pain level too.

    The bigs are not trying to trick us, they are trying to maximize returns out of the bucket of crap that happens when energy doubles YoY and the manufacturing base is emigrating to escape union labor and environmental regulation.

    If Max Pain is where they make money, shame on us for not being prepared for that. Anyone that bought the bumps and sold the dips yesterday got what happens when you're on the wrong side of the trade. I hate it when it happens to me and I understand the pain, but my Number 1 rule is, stocks don't move in a straight line, and if you are correct on the trend, you'll eventually be OK. Secondary to that is: Any trend can end at any time. And like golf, the only shot that counts is your next shot. No fortune made or lost is permanent.

    You either have the brains and guts to play here or you don't. You are playing against the best and the brightest. (I just have moderate brains, good instinct and guts) If you aren't up to it, there are safer ways to build wealth. But if the big kid keeps taking your lunch money, you can either learn to fight better or you can leave your money at home.

    My bet is they looked at the price, they looked at Max Pain, they sensed all the fear after Google and RIMM and they decided that 165 could be done. On 13 Jul, I posted in this forum that I was looking to pick up the stock at 165. I did, and I hope it wasn't a mistake but it is what it is. We'll see whether I'm a hero or goat next week.

    Happy Hunting
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    Great post Zach. I am an average joe investor who was holding the july 175 calls and was in utter disbelieve as I saw the past 2 weeks unfolding. I lost close to 20k. It's amazing that this continues to happen in this day and age.

    BTW I'm sure you've already seen this but here is a link to a blog that describes Market manipulation by Jim Cramer.
    http://www.midasoracle.org/2007/03/27/jim-crame...
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    OOOH, it hurts.
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    Here's one of the reasons aapl was flat while the banks ran up.

    http://seekingalpha.com/article/85882-mother-of....
 

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