Tuesday, April 22, 2008

Apple analysts: Reading too much into daily stock market gyrations?

It's not very common to see two different media outlets come out with two different explanations behind a stock's decline. Especially if the stock is a market darling like Apple.

Apple Inc.’s(NASDAQ:AAPL) finished Tuesday down 4.73% (7.96) to 160.20. Let's see if we can find out why. Before the market open, Apple's shares were downgraded by AmTech Research.

Marketwatch ran a story, attributing the decline to the downgrade.

"This was a very tough decision as we have been bullish on Apple for the past several years," Wu wrote in a note to clients, adding that the stock has more than tripled in that time.
The move seemed to cool some of the enthusiasm around the stock. Apple shares slid $7.96, or 4.7%, to close at $160.20. The stock has come up from the $120 range seen last month but is still off its all-time high of $200 seen at the end of 2007.

Eric Savitz also blogged in the morning, seemingly pointing to the same conclusion.

In the meantime, AT&T Inc.(NYSE:T) released their earnings, and had an earnings call. Apple kept drifting down. Techcrunch came out with the headline: "Apple shares slump as AT&T Gives Vague Details on iPhone Growth"

Were both of them right? Or were both of them wrong?

Remember, the earnings downgrade was before the opening bell. If the downgrade had been such a negative event, I would have expected the stock to gap down. However, Apple opened only about a $1(0.6%) lower than it's Monday's closing price and continued drifting downwards till a little after noon. This was inspite of the Lehman Brother's upgrade, that too as a top pick with a $195 price target, which kicked in around 10.45 am EST..

Interestingly, the S&P 500 gapped down by a similar percentage at the open(0.6%), and continued to move downwards till around 1 pm, after which it drifted sideways.

Remember, Apple is a high beta high flyer (Beta of 2.9 from Yahoo finance). A decline of 3% in Apple on a 1% down day would be par course given it's historical volatility and high beta. Could the real reason be a decline in line with the market, in addition to some profit taking in an overbought stock? Remember, Apple is up nearly 45% since bottoming early this year.

So what do you think was the real reason for Apple's downward movement?

1. AmTech downgrade?

2. AT&T being vague about iPhones?

3. The market being down on Tuesday?

4. The market being down AND profit taking in an overbought stock?

The truth be told, no one really knows the reasons behind the daily gyrations of the stock market. Investors will be wise to shut out the short term noise and focus on the long term signals. Freakanomics has an interesting post on over analyzing short term market gyrations.

Ascribing a cause and an effect to every short term market fluctuation reminds me of our ancestors who would sit under a starlit night and point out shapes in the sky: the Orion, the Big Dipper.

This ain't too different.

Except the constellations at least served as navigational aids. These constant rationalizations and explanations only confuse the average investor.

As Benjamin Graham famously said: In the short term, the market is a 'voting' machine. In the long-term, the market is a 'weighing' machine.

Ticker Symbols mentioned : AAPL, LEH, SPY, T

Disclosure: No positions in any securities mentioned above.