If you like roller-coasters, Apple:
AAPL is a stock for your liking. Since late 2012, AAPL reached it's climax of around $700 per share and promptly began its decent to a recent low of $418 per share. Charles Kindleberger, in his book
Manias, Panics, and Crashes, suggested that speculative manias commence with a speculative interest displacement. This described displacement derives from a new investment product or increased profitability of already established investment products. The end result: euphoria. Kindleberger stipulates, "details proliferate; structure abides." Similarly, John Stuart Mill in
Principles of Economics observed a similar process: "Some accident which excites expectations of rising prices...sets speculators at work... In certain states of the public mind, such examples of rapid increase of fortune call forth numerous imitators, and speculation not only goes much beyond what is justified by the original grounds for expecting a rise of price, but extends itself to articles in which there was any such ground."
Below, I've created a chart that visually depicts the euphoric AAPL bubble. The chart has been colored in a fashion that indicates each
doubling-time. What's more important and often neglected, is the amount required to increase from one doubling-time to the next. In the case of AAPL, when a doubling-time occurs, AAPL had to produce and sell more product than it has ever sold in it's history of selling. Below, AAPL maintained a growth rate of approximately 35% annually, or a doubling-time of two to three years. As it is probably apparent to most, this growth rate is highly unsustainable. Imagine as a company, you must earn more money than you've ever earned in the history of being a company, every two to three years. Put another way, a person would need to double their pay every two years in whatever career field they've chosen. For most, this is a monumental task.
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| AAPL Monthly Chart: Doubling-times. |
While reflecting on the works of W.D. Gann, I came across an interesting idea mentioned in
Tunnel Thru the Air or Looking Back From 1940. In Geneis 1:7, it is written,
For God has not given us the spirit of fear, but of power and of love and of a sound mind. This is the first time the bible mentions fear. While a person does not need to hold a religious belief to ascertain knowledge, he should be open-minded, as knowledge may present itself from anywhere. As a trader, I was curious to see what the Bible evidenced about fear and greed, being that understanding these two emotions are paramount for stock trading.
Within just a few minutes of reading, I realized the Bible gave examples of our two most primal emotions:
fear and
greed.
Greed
When the woman saw that the tree was good for food, and that it was a delight to the eyes, and that the tree was desirable to make one wise, she took from its fruit and ate, and she gave also to her husband, and ate.
Genesis 3:6
Here the parable of greed fueled by the desire to obtain more
, influenced Eve's actions of eating the fruit.
Fear
I heard the sound of You in the garden, and I was affraid because I was naked, so I hid myself.
Genesis 3:10
Soon after the partaking of fruit, Adam and Eve heard God, and became fearful because they had been disobedient, thus they covered their naked bodies. If we extend this line of reasoning, does it not seem irrational for Adam and Eve to cover their naked bodies? Even as early as Genesis, we see evidence of how fear induces irrational thinking, which leads to irrational action. We see this same structure of fear and greed in markets today.
Around the turn of the 20th century, Charles H. Dow created
Dow Theory in an attempt to explain market movements. Below, Dow Theory conveys a chart similar to the AAPL chart listed above.
Notice how in the accumulation phase (on the AAPL chart: colors blue and red) little upward progress is made, while the participation phase (orange and yellow) continues to stimulate growth, when lastly, the excess phase (green) completes the parabolic movement, signaling the bubble's demise.
Six months ago I predicted the AAPL bubble, near highs, as seen below.
APPL: A Bubble in the Making by
infinite_margin on
TradingView.com
While it's safe to assume AAPL is still an extremely profitable company, we must be aware of the possibility of it becoming a value trap. AAPL may first appear to be a cheap investment offering profitable intrinsic value, we must not forget the parabolic effects of greed and the sobering results of fear.
