It's football season and no doubt stadiums will be filled this
weekend as both the college and pro seasons are well under
way. When you go to the game you try to get there
ahead of time, to avoid a parking hassle and to enter
the stadium at your own pace. Once you are at your
seat you wait for the stadium to fill and the game to begin.
All is well, relatively calm, and semi-organized during the
event. But when the game is over, chaos suddenly takes
Shouting Fire in a Crowded Theater
Entering the stadium is a breeze as other patrons arrive at
different times preceding the event, but when the event
concludes, it's usually a completely different
story. Everyone rushes for the exits at the same time.
The stadium hallways are packed, the crowd is immense, and the
roads are parking lots. Sometimes it can take significantly
longer to leave the event than it took to enter it.
This is the same analogy used for stock bubbles or parabolic
price rises. Everyone slowly piles in, but eventually there
is a trigger that sets off a cascade of selling resulting in a
similar sort of chaos as investors all head for the same
exit. When looking at a price chart of Apple (NASDAQGS:AAPL)
some may say it is currently an example of a brewing bubble (more
on that below).
Buyers come and go as they please at their own gingerly pace (in
Apple's case for decades). Eventually the stadium gets full
(buyers outnumber sellers) and the action takes place (stock goes
up). But often when that action is complete there can be a
rush out of the stock, as everyone heads for the same exit at the
same time. Chaos can ensue and the stock falls far,
fast. This of course has yet to occur for Apple.
There are many examples throughout history of parabolic moves up
in price that then come crashing back down much faster than the
initial advance. The Dutch Tulip Mania in the 1600s, the
Mississippi land bubble of the 1700s, Gold (NYSEARCA:GLD) and
Silver (NYSEARCA:SLV) in 1980, Japan late 80's (NYSEARCA:EWJ), and
countless examples of individual stock and commodities through the
years that had astronomical price rises only to come crashing back
down eventually. Some have even said that the Emerging
Markets (NYSEARCA:EEM) were in a bubble in the mid 2000's and we
are even in a bond (NYSEARCA:TLT) bubble right now. (
What are Dow Transports saying about the Stock
The chart below is of the inflation driven Gold "bubble" of the
late 70's. After a 4x price rise in under 2 years, Gold came
crashing back down in as many years.
Is Apple in a Bubble/Parabola?
When investors speak of parabolic moves, 9 times out of 10 it is
because of a charting choice. Beauty is in the eye of the
beholder as the saying goes, and although parabolic stock price
moves do indeed exist, they are rare. There is one easy way
to avoid falling into the trap of calling all vertical moves
parabolic. The best way to show this is through charts.
Below I show two charts of Apple stock with the exact same dates,
prices, etc. There is only one key difference. Can you
This first chart indeed looks parabolic and is the chart most
basic charting programs would incorporate in their software.
This next chart looks a lot different even though for all
intents and purposes all of the information on it is the
same. What is the difference?
The difference between the charts is simply their scale.
Notice on the right side, the price axis. The top chart is
your typical standard stock chart that measures price
arithmetically. This means the standard measurement is based
linearly, in this case in dollars. The difference in the
vertical axis is always the same amount based on a fixed dollar
The second chart is scaled logarithmically. A log scale
displays the values based on an order of magnitude, in this case,
percentages. Based on a log scaled chart, Apple looks a lot
For most stocks, using an arithmetic or log scale chart wouldn't
make much difference if the price historically is similar to
today's price. In Apple's case, though, price today is a lot
larger than it was historically. A $20 move today is nothing
compared to a $20 move in 2005. Using a log chart fixes this
distortion and should usually be the default chart choice to
prevent such discrepancies when they do occasionally occur.
What's Next for Apple?
When looked at on a percentage basis, Apple is in a decade long
uptrend which I have shown with trendlines on the chart
above. The red trend channel is the shorter time frame and
shows no sign of weakness at this point. If price were to
fall below $600, that would be a sign that the 4 year uptrend in
Apple has changed to negative, but until that occurs Apple's trend
is still healthily up. At around 20% of the Nasdaq 100 Index
(NasdaqGM:QQQ) and over 5% of the S&P 500 (NYSEARCA:SPY), as
long as Apple can maintain its uptrend, the broader US indices
should continue to frustrate bears.
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