Sunday, February 26, 2012

The Apple Bubble

In the last few weeks, Apple has seen its stock price (and its valuation) soar into the stratosphere, reaching $500 a share before pulling back. The company's stock has started to go parabolic even on a logarithmic chart, indicating that the stock is in the late stages of a bubble after decades of advances. Along with its stock price, the company achieved a revenue of $108 billion and a profit of $26 billion in 2011.

Here is a long term chart of Apple, which is a component of the S&P 500, Nasdaq, and the Nasdaq-100:

The company's stock was on the tail end of Cycle wave III up when it went public. After reaching a Cycle degree peak in 1991, the company's stock declined for over 6 years, completing Cycle wave IV in 1997 with a low of just over $3 a share. From the low in 1997, the company's stock price and valuation has soared into the stratosphere, recently hitting $500 a share as Cycle wave V comes closer to completion.

Here is a close-up of Primary wave [5] of Cycle wave V up:

Apple's stock price could conceivably hit $1000 a share at the height of the mania before the bubble bursts. The stock is going parabolic now -- as the mania reaches its epic peak, the stock price should spike higher into the stratosphere. The last phase of the mania should commence with the start of Intermediate wave (5) up around April 2012. After hitting the peak, which could be $1000 a share or more, the bubble should burst in June 2012 as the business cycle high point is reached. Since Apple makes up a substantial part of both the S&P 500 and the Nasdaq, the spike in the company's stock price should play a strong role in pushing the S&P 500 up to 1440 and the Nasdaq up to 3100 by June 2012.

There is additional evidence that the large degree peak is close at hand. First is the magazine cover indicator, in which the company was featured in 2 magazine covers.  A third appearance on a magazine cover is still possible, especially after the company's stock price hits $750 a share. The magazine cover indicator is a well known contrarian indicator that can signal that a reversal is imminent as almost everyone will have acted on the trend by then. Second is the strong level of speculation in the company's stock as a record 216 hedge funds have Apple stock in their portfolios. The strong level of speculation means that there is a strong level of bullishness present. Optimism is sky high as Reuters is speculating that Apple could be the first company to achieve a valuation of $1 trillion. Some mainstream media journalists are going even further with the linear extrapolation, calling for Apple's valuation to go as high as $3 trillion by 2022.

In many ways, the parabolic spike in Apple is comparable to the South Sea Bubble in 1720. In early 1720, the company's stock price was around 165 pounds a share when news of the company bearing England's debt burden sets off a speculative frenzy that causes the stock to soar as high as 1000 pounds a share. In September 1720, the bubble burst, ushering in a 64 year bear market and major depression in the economy. Apple is indeed following the same pattern as the South Sea Company with a speculative frenzy now in the early stages with an epic super-spike still in the future. Even now, there is a great deal of speculation and anticipation about the iPad 3. There are already rumors that the iPad 3 could be comparable to a PC in terms of capabilities and that it will soon be released into the marketplace. A hand-held device with capabilities comparable to a PC would indeed be a game-changer in the economy in the same way that the South Sea Company bearing England's debt burden was back in 1720, and could indeed be the catalyst that triggers the epic super spike in the company's stock.

The South Sea Bubble ended in a bust, and there is every reason to believe that the "Apple Bubble" will also end in a bust. The bursting of the Apple bubble will usher in the next part of the long bear market. With many hedge fund managers and investors owing Apple stock, the implications of the bust will be widespread with a lot of wealth disappearing into thin air in a matter of months as the DJIA falls from 13750 in June 2012 to around 5500 by 2016.


  1. This comment has been removed by the author.

  2. The press seems intent on reporting on minor issues with the iPhone – that every device maker deals with – and blowing them completely out of proportion. We saw it with iPhone 4 Antennagate debacle. And now we are seeing it happen again with the iPhone 4S implying that battery issues is going to somehow spoil the iPhone 4S’s ascension, despite that Apple has always been incredibly proactive about replacing broken phones. Or speculating on iPhone sales numbers that for a quarter that hasn’t even happened yet? In what business world does that makes sense? Come to think of it aren’t there laws against doing that?
    sell structured settlement

  3. Wasn't the South Sea Bubble a fraud? Apple may be an egregiously expensive stock market religion but last I heard it was no Enron. Better to compare it with Radio (RCA) in the late twenties. Now that was some good old time stock market religion for sure.