Tuesday, August 14, 2012

Update on the Apple Bubble

This is an update on the February 2012 blog entry on the Apple bubble, in which a case was made for Apple being a parallel of the South Sea Company. The Apple bubble is still in progress in spite of a decline that unfolded earlier this year. Investors are still very bullish on Apple as illustrated by a number of articles such as this one that is calling for more upside in Apple's stock price.

There was a very strong reason to not call a long term top on Apple even though the rally appeared to have played out. Here is an intermediate term chart of Apple to illustrate the point:

Apple's high for the year occurred in April 2012 before the decline started to unfold. The decline, now identified as Minute wave [iv], unfolded as a zigzag and reaching its low point in late May 2012 before resuming higher. There is already some recognition that Apple is a bubble, yet many people have attempted to call a long term top in Apple's stock, saying that the bubble has popped (the top calling has been unfolding since 2008!):

1 -- Yahoo news -- Apple bubble already starting to burst (August 18, 2008).

2 -- Seeking Alpha -- The Apple Bubble is ready to burst  (November 29, 2011).

3 -- Forbes -- Five signs that Apple is a bubble (April 23, 2012).

Bubbles always end in a bust, but they also seem to last longer than many people think possible. After the decline earlier this year, the stock is on the rise again. However, it is quite obvious that the rally lacks the impulsiveness of earlier rallies that propelled the company's stock to $600 a share earlier this year. The rally from the late May 2012 low appears to be unfolding as an expanding ending diagonal with the last part of the rally in progress. The target for the rally is $664 a share to be hit within the next few weeks before a sharp sell-off commences with the advent of Intermediate wave (4) down.

Here is a longer term chart of Apple, showing how the rest of the Apple bubble may play out:

The blue box shown on the chart is the price territory of the fourth wave of one lesser degree, which would be around $300 to $375 a share. This follows a guideline that fourth waves go into the price territory of the fourth wave of one lesser degree. A sideways pattern for the coming Intermediate wave (4) down is in the forecast, most likely a flat, which should take around a year to play out.

As Intermediate wave (4) down climaxes in around June 2013, Apple could either come out with (or announce the unveiling of) an entirely new innovative product or make a move to acquire a large social media company. Either one could be seen as a massive game changer and give investors a reason to go on a bullish frenzy with the mainstream media along for the final ride up. The final stage of the Apple bubble will unfold during Intermediate wave (5) up, unfolding as an epic blow-off top that takes the company's stock as high as $875 to $1000 a share by June 2014. As a precursor to the coming blow-off top, there are already at least 216 hedge funds that have Apple in their portfolios, which is indicating a very high level of bullishness on Apple stock.

This chart shows the final Primary degree advance in Apple stock:

The final Primary degree advance will have lasted 5 years, from 2009 to 2014. Notice that Intermediate wave (2) down in April 2010 was very brief and very sharp, while Intermediate wave (4) down, as a guideline of alternation, is likely to have a much longer duration and unfold as a flat (a sideways pattern).

The bursting of the Apple bubble will have widespread implications as the stock is a component of both the S&P 500 and the Nasdaq. The aftermath of the bursting of the Apple bubble is expected to result in a massive decline in the stock market in general from 2014 to 2016 with the longer term aftermath persisting for years if not decades. The effects of the Apple bubble bursting will first be felt in the technological sector with many tech jobs being purged off the map in the 2014 - 2016 time frame, which will then have a ripple effect on other areas of the economy and job market.

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