An Apple A Day...

People hate when I compare Apple to Blackberry. They cite valuation differences when speaking of these two - which they are correct. That is, when Blackberry (then RIMM) peaked out near $150 in 2008, the valuations were extremely stretched vs. Apple today.

What they fail to realize (or choose not to acknowledge) is that the same argument was made when Apple was above $600 by them as I made the argument that the Apple bubble was popping. 

Like I explained in the TESLA post, valuation in bubbles is pointless because they lag and tend to catch up to price (or down) as sentiment moves stocks, fundamentals do not. In Apple's case, we saw this name become the Hedge Fund Hotel in 2012, with over 220 hedge funds owning this stock, many of them as its top holding. Sentiment on social media sites remain very bullish, again citing cash and P/E (etc) but that same case could have been argued back in the $600s.

I am measuring the price performance of Apple to Blackberry. Not the valuation, not the product line, nothing else. And the pattern is objective. We can argue what the qualitative meaning is that Apple now has a dividend and that fact that it's close to 10x PE and 3x Book etc, but we cannot argue price and similarities. They are what they are. Whether Apple turns out to play itself out like Blackberry, we can argue, but I won't.

Let's start with the DOUBLING EFFECT of Blackberry. The doubling effect takes the cycle low and follows how many times it doubles itself before it peaks. As an example, if a stock was at $10 and doubled, it would $20, and doubled a second time it would be $40 and so forth and so on.

In 2005, Blackberry made a cycle low of $17.67. From that point on, Blackberry had 3 doubling effect moments (2006, 2007, and 2008). The chart show the doubling effect:

As we see, price pushed through the 3rd doubling effect event but only by a few dollars before the peak was put in. Price reversed course and dropped all the way down to the first doubling effect around $35. 

Now before we move to the Apple chart let's point a few things. First, when priced peaked we saw a classic bull trap occur. Let's quickly review the bubble model:

Now, same Blackberry chart but with the BULL TRAP and CAPITULATION points marked:

Now let's take a look at Apple's doubling effect:

What do we see? Well the cycle low was at $76.56 (after peaking around $200). From this point we had 3 doubling effect events, like Blackberry, and we saw price push through the 3rd doubling event before peaking, again like Blackberry.

What one must pay attention to is the time difference. For Blackberry, the cycle took a shorter period of time than that of Apple. Therefore, Apple's slide will take longer. What is next for Apple? The bubble model would indicate that we are bottoming and beginning to enter the bull trap phase.

I suspect we could see $550 to $600 in Apple in the near term, catching the small guy off guard and I believe this is where the trap will be set.

The long term? It should go without saying that it won't be pretty for this stock if it plays itself out like Blackberry. Will it get down to ~$150? I don't think so. Based on Apple's previous massive drop from ~$200 to $~75, I suspect we will see a bottom around $250-$275. 

But what if I am wrong? Well that's always a possibility and if so, the recent low would indicate that a new cycle has formed and we should see a doubling effect from there, which would indicate new all time highs, however I highly doubt this for the reason that Apple has seen doubling effects like this before and had a major correction afterwards (2004-2008). 

Secondly, the regression trendline (of stock's life cycle) is currently at $210. While this number will adjust itself, I believe it will do so (adjust higher) as Apple moves higher, flattens out, and begins to sell down below the $300s. 

Apple will still be innovative and still release great products and customers will still embrace the company, however that does not equal higher stock prices. And neither does valuation. Sentiment (emotions) will be and always has been the driving force to any asset. A drop to $250 in Apple does not mean the company is dead and done, which some people infer. Rather, we are just reverting back to the long term mean.

 

We'd Like To Welcome TESLA to the Bubble Party

Everything seems to be in some form or another of a bubble - from equities to low rates to the Fed' balance sheet. But no one takes the cake like TESLA. The sentiment around this stock is clearly shown in both the volume, the stock price, and probably most importantly the willingness of market participants to continue to pay high premiums for options, both in puts and calls. 

Many people focus on valuations when it comes to bubbles (as in P/E Ratio's or Price to Book). These are lagging indicators and in fact have little to do with the bubble model at all. Valuation (as you will see on the chart below) refers to market price and not the underlying value of the business. See Amazon as an example. This stock does not show signs of bubble-like price patterns yet its earnings and other value metrics are, well, hideous. 

Bubbles are driven by sentiment, specifically different stages of investors and emotions. A pop of a bubble does not indicate bankruptcy or the company is worthless. It is a simple reflection of market participants emotions. An asset that "bubbles up" leaves it true underlying valuation in the dust as price rockets higher. 

Not all bubbles are create equal in size and lengths either. Some bubbles may take years to break down and others can take days but many times they are obvious when spotted... that is, if you recognize how a bubble forms (as shown below):

COMMONLY KNOWN BUBBLE MODEL

TESLA IS NOT DIFFERENT - WE ARE IN THE BULL TRAP PHASE

TESLA LOG SCALE SINCE IPO - WE HAVE SEEN THIS SORT OF THING BEFORE

TESLA SINCE IPO - BLUE LINE (LEFT AXIS) IS IMPLIED VOLATILITY AND POINTS WHEN IT REACHES 75% OR ABOVE AND HOW PRICE FOLLOWS

I'd Show You, But You Won't Believe Me

(UPDATES AT THE BOTTOM)


 ...hell,  I don't even believe me. I mean, it really couldn't ever happen could it? 

Could... it... ?

Japan's Nikkei 225 dropped ~75% from peak to trough back in the 80s and 90s. The NASDAQ dropped from 83% from peak to trough from 2000 to 2002. The Shanghai Comp fell from ~5900 to ~1800 in 13 months. We saw similar drops in Oil around the same time. These movements are not as few-and-far between as we may like them to be, or even think.

So what if I told you that if the oh-so promising looking analog between the S&P 500 from 1995 to Present and the Dow Jones from 1962 to 1975 plays out, that the S&P 500 Index will drop ... get this... 90% from its peak!

Yes, 90%. Which if the S&P 500 is at peak, at 1687, as the analog nearly perfectly predicted (it predicted 1681 which I will explain in this post), then we can expect a S&P 500 price below 200!!

So how in the hell did I get to this price? Here is the explaination:

First, I have written extensively on the S&P 500 from 1995 to Present mirroring that of the Dow Jones from the 1960s and 1970s. All expectations ride on this analog playing itself out. I've been mentioning this analog since January with my original post "NEO AND THE BLACK CAT" (click link to see story) but here is one of many charts I recently posted:

... and here is the post that I recently made where I told the story of the Dow Jones battle of 1,000 being a similar battle of the S&P 500 fighting the 1550-75 level, entitled: "A STORY WORTH READING" <--- click link to post


I also recently posted this chart as a summary to that story:

Now that we have established how relentless I have been around this analog, let's talk numbers.

First, how did I get to 1681 as a possible top? Very simple. In the 60s and 70s the Dow Jones struggles to get through the key 1,000 level. When it finally did it get through, it peaked at 1,067, or 6.7% greater than it's "struggle level". If we call the "struggle level" for the S&P 500 it's previous high then that leaves a 6.7% rise from 1576 to a price of 1681. 

Here are some more charts that are critical to the analog and where it ends and how we get to below 200...

Chart #1: The percentage gains and losses from peak to troughs for both the Dow Jones of 60s/70s and the S&P from 95/Present. For these charts, we are assuming that 1687 is the top:

As we can see, the swings of the S&P are much larger (both up and down) relative to the Dow. Now, here is where it gets VERY INTERESTING:

Look at this table below and tell me what you see:

Do you see the pattern?? 

Each bull cycle higher is about 3x greater in percentage terms in the S&P than the Dow in this analog, and the bear cycles are about 2x greater in percentage terms.

This means that if the last bear cycle of this analog follows through, the -46.5% in the Dow's last bear cycle computes to roughly a 90% drop for the S&P 500 that it will reach a level at or below 200!!

This is what the early chart looks like assuming the analog comes to fruition with the last S&P leg dropping down by 90% from its highest level.

So the next question is HOW LONG DOES IT TAKE?

Looking at the peak to troughs in this analog, I took the days it took to reach each point and divided it by the percentage move. For instance, in the breakout performance of the S&P 500 from 1995 to 2000, each day (including weekends and holidays) was a gain of roughly 0.126% ( = total percentage move divided by days). 

We can gain an idea based on the last leg down of the Dow Jones in the early to mid 1970s of how long the S&P 500 last leg down will be by comparing previous bear cycle data points (as we did in the previous instance above). 

Doing such leaves us with a wide range in terms of time frame. On the short end of the scale, we have (revised) 1640 days from peak and on the long end of the scale, 2595 days from peak.

Again, to make it clear, these "days to trough" are gathered by comparing peak to trough percentages of the analog and then dividing them by how long (in days) it takes to get there. 

Here is a chart w/ the final legs down - for the Dow which was completed and for the S&P 500 which is estimated on the short end of -0.13% per day (chart #1) and then the same chart but with the longer estimated time frame (chart #2).

Chart #1

Chart #2

My work around this analog (I believe) has now been completed. I hope these series of posts and blogs have been beneficial and if not... at least entertaining. Maybe one day we can look back and call these posts crazy-uber-bear-nonsense and wrong, and I hope so, but we cannot lie to ourselves around data specifically symmetrical data, or that which is analogous. 

Good luck and have a great Memorial Day Weekend.


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UPDATE: June 1st, 2013

Couple of other charts to consider here:

First, this chart shows the ultimate wedge in the S&P which started in 1929 and ended in 1985, or roughly 55 years. The yellow dashed line is where the breakout occurred, at S&P at 190 points.

From there, we began a major launch, which had its largest move from 1995 - 2000. The analog shows roughly a drop in the S&P 500 of 90% (based on Dow 60s/70s percentage pattern) and would coincide with a retest of that 190 level:

Let's not forget that it took 55 years for the S&P to reach 190 points while it has taken less than 30 years for the S&P to move from 190 to over 1650 points. 

More updates to come...

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UPDATE: June 9th, 2013

Interestingly enough, as the S&P 500 of 1995 - Present looks like the Dow of the 60s and 70s, the Dow of 1995 - Present looks like the S&P of the 60s and 70s:

Dow Jones of Present

S&P of the 60s and 70s

... and more so than the S&P, the Dow is it critical levels -

The Dow Jones Log Scale

In The Valley of Beta

Technically savvy or not, interest in volatility, beta, or not, one needs to should take the time and understanding how this setup echoes that of 2007 top.

As one should know, the VIX has a negative beta (negative correlation). As the S&P 500 prices moves higher (lower), the VIX does the opposite. Of course, there are days where both the VIX and the S&P 500 rise and fall together, but these days are not typical. 

Beta itself is a measurement of how an assets price performance moves against the S&P 500. For instance, if beta for stock XYZ was +2 (or just 2), then that would indicate that on average, as the S&P 500 moves higher by 1% stock XYZ would move higher by 2%.

If we take a look at the past 1,000 days of the VIX and it's beta, it has averaged around -3.25. So as the S&P 500 moves higher by 1%, the VIX falls by 3.25% and if the S&P 500 moves lower by a 1%, the VIX rises by 3.25%.

However this average has been much lower, as low as -7 before. Because the VIX (in theory) cannot go to 0, as the S&P 500 moves higher, the VIX balances out at lows. When the S&P has even a small correction, due to the VIX at such low levels, the VIX rises hard. Therefore when the S&P 500 is down 1%, we see insane daily moves in the VIX (e.g. 10-20% gains in one day). This occurred in 2006-2008 when we saw the beta of the VIX decline heavily as stocks were making moves much higher as the VIX stayed around the 10 and 11 mark before the S&P corrected and the VIX shot higher.

What soon occurred was a reversion to the average, seeing stocks plummet and seeing the VIX launch to insanely high levels during the financial collapse. As the chart shows, the absolute bottom point of THE VALLEY OF BETA occurred after the VIX made its uptrend. In fact, the VIX was around 30 at that point. This is due to the long length of the input (1,000 days).

With this said, we are seeing the same thing yet again -

We are currently below the point in 2007 where the VIX makes a bottom. In fact, while the S&P made a new high on Wednesday (followed by one ugly reversal) the VIX made a low back in mid-March 2013.

If we reduce the input length from 1,000 days to 50 days, we see a very similar pattern forming with the beta of the VIX -

What is notable is that in the periods of large negative beta, 2007 and in 2013 where driven by a large leg higher in equity prices as the VIX based out followed by a quick period of selling, driving the VIX much higher. We then saw the trend of higher equity prices resume but the VIX never made new lows. The chart below shows the S&P 500 (in blue, left axis) against the 50-day VIX beta -

Again, this goes to the earlier statement that the VIX can't (won't) go to 0 and therefore a high negative beta occurs when the VIX remains at low levels with the S&P 500 rises before a quick correction in the S&P leads to huge pops in the VIX. It is my belief that we are in a similar situation to that of 2007 as we see suppressed volatility coupled with (and driven by) an influx of investors chasing higher equity prices and as prices correct, the VIX will begin to get its legs back under it.

Finally, I want to share the SKEW/VIX ratio chart dated back to the start of 1990 -

As I have stated in previous posts, this is one of my favorite ratio charts. The SKEW essentially tracks tail risk while we know the VIX tracks implied volatility, both for the S&P 500. The red line is a linear trendline while the black line is a 1,000 day moving average. 

Unlike the charts of the VIX and beta, the SKEW and VIX have ranges. The SKEW can move from 100 - 150. As the ratio moves into the 10 - 12 range, it has indicated a lack of fear (or greed) and shows periods in which taking profits would be the best strategy while possibly building a "short book".

One of the most interesting parts of this chart is the peak that occurred in 1994 and then its move down, which was opposite of what the stock market did. This did not occur in the 2003-2007 bull run nor is it occurring now, mostly driven by a lower VIX. We saw 20+ VIX in the 1990s where, if seen now, some professionals would consider selling volatility all day long at those levels. Food for thought.

Have a good weekend.

Every Important Chart I Know

Notes are either in the charts or are captions... two separate parts to this post: Technical Charts and Fundamental Charts.


TECHNICAL CHARTS:

Similar price pattern now to what occurred in the Dow back in the 1960s and 1970s. The Dow peaked out 6.7% above its breakout before falling ~50% in 18 months. (Dow chart below, before big fall, see previous post)

to 

5-Year Rate of Change for the S&P 500 Index

VIX Hockey Stick can be seen by watching its 50-day Beta. A repeat of 2007 occurring?

White line is 5 year UST yield - 30 year UST yield spread / Blue line (left axis) is S&P 500 Index

White is US Treasury Inflation Protected (TIPS) to US Treasury ratio / Blue is S&P 500 Index (left axis)

Could Silver be re-entering a bull stage? Cycles say "yes".

FUNDAMENTAL CHARTS:

The continuation of a dollar-for-dollar out-performance in market value of equities vs. wages + corporate profits has historically not held true. Previous instances show ~15 years before equities caught up (or down) to wages and corp. profits but this cycle of equity value out-performance has been running for 20 years.

This chart indicates major a contraction in corporate profits in the coming years.

This chart says that the year 2016, the subsequent 15 year return (so since around 2000 - 2001) could be -2.5% if this trend holds true.

A Story Worth Reading

I want to tell you a story. It's short and it's worth the 5 minutes of your day. 

This is a story of persistence and patience... but not by who you may think.

In the 1960s and 70s the Dow Jones Industrial Average reached a milestone - Dow 1,000!! But make no mistake about it, that beautiful-once-three-figure index turned four figure did not come without major hesitation. Take a look at some of these charts to see what I mean:

January 1966: Dow touches 1,000 before selling down over 25 % by October of the same year!

The Dow Jones 1,000 Double Top before the selloff!

December 1968: The Dow touched 995, but once again fails! The Bulls could not follow through yet again! This time, the Dow Jones drops nearly 37% in roughly 18 months!

The Dow tries again to break through 1,000 but fails!

Q2 and Q3 of 1972: The Battle for Dow Jones 1,000 resumes but 980 seems to be the threshold. The Bulls, after over 6 years of fighting at these levels, are exhausted!

Multiple Tops in the Dow Jones around the 980 level

All seemed doomed. The Bulls looked to throw in the towel. All hope was lost... and with one last effort, the Bulls gave it their all...

November 1972: The Bulls Have Done It! They take out and run through Dow 1,000! All Hail The Bulls as they have finally defeated the Dow 1,000 Bears!! "We may now rest" they say...

THEY DID IT! DOW JONES 1,000 HAS BEEN ACHIEVED!

But as I said, the bulls were exhausted. They had no energy left in them. And it was no time to rest. The taste of victory was so sweet... almost too sweet... and then, the Bears, once thought to have been slaughtered, emerged from hibernation. 

January 1973: The top is put in and the Bears finish what they came here to do. The Dow Jones collapses from a high of 1,067 to a low of 573 by October 1974... a low greater than the previous two occasions in which the Dow 1,000 Bulls made their attempt.

With a grin on their faces, the Bears clean the meat from Bulls bones

 Now... I want you to take this same story, but instead of the Dow from the 60s and 70s, apply it starting in 2000 for the S&P 500.

No, it doesn't repeat word-for-word, but the stories Act I and Act II are identical. In Act I we get a high followed by a major down move (2000-2003). In Act II, we get a retest of the top which fails to break through, followed by a low which was lower than the previous low of Act I (2007-2009). 

And now, present day, we are in Act III where we have FINALLY cleared the barrier we've been fighting for 13 years and the Bulls can claim victory... but the story didn't read that way in the past. In fact, it reads that the low market price in ACT III is even GREATER than that of ACT II. 

Stop me if you've heard this story before...