Neil Cybart: Why Apple moved 25.6% in six days

The market was looking for an excuse to fall and along came a virus, pursued by algorithms.

From “Is the Stock Market Being Rational?” mailed Tuesday to Above Avalon subscribers ($).

Heading into 2020, this was a market desperate for a reason to go down. We can maybe even say the market was becoming giddy at prospects of prices falling for some reason. The problem was there just wasn’t any good reason for the market to go down.

There is no explanation for how a company like Apple sees its equity value change by nearly 20% in two days. That’s not coronavirus impacting iPhone supply or demand getting hit by slower economic growth around the world…

My theory is that we are seeing the impact from years of momentum flowing to passive investing (low cost index funds)…

Another factor to consider is that active investing is increasingly being characterized by crowded trades in which everyone is chasing the same companies and ideas in an attempt to beat indexes (something that is proving harder by the year).

These factors are coming together to lead to sudden and dramatic market moves controlled by algorithms that have little to no connection to what is actually unfolding in the news cycle.

The market is not going down because portfolio managers, sitting in front of a computer, are deciding to sell shares in companies X, Y, and Z after running some financial work regarding coronavirus. Instead, the market may decline 5% one day for no other reason that the market was down 4% the previous day.

Based on current trends, it seems inevitable we are going to see longer periods of market calm periodically interrupted by sudden and shockingly dramatic stock price swings both to the downside and upside.

My take: Cybart, a former equities analyst, regularly takes first place in the Apple 3.0 Earnings Smackdowns.

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14 Comments

  1. David Emery said:
    It’s an interesting argument, but it seems to me that Apple’s substantial percentage of both Dow and S&P 500 (as we’ve discussed here) would argue it’s already highly represented in index funds. So the ‘too much money chasing too few shares’ argument doesn’t quite ring true, to force a full 20% change in this particular stock.

    There has to be more to it than just ‘inertia’ to explain why Apple in particular swung so wildly (down almost $10/3.29% today/Tuesday. – but that’s consistent with the broader index losses.)

    I’m guessing that at least part of this has to be due to lack of confidence in Apple’s relatively quick appreciation in P/E ratio over historical levels.

    0
    March 3, 2020
    • Gregg Thurman said:
      David, when you say “inertia” you are really describing the cascade effect generated by unthinking algorithms. Those algorithms are programmed to do Y when X happens. The point in using them is to make pennies on each of hundreds, thousands, millions of high speed trades.

      I think they should be banned because they are deaf, dumb and blind, unable to recognize a transitory selloff or short lived rally on fake news. They add volatility to a market that gets more than enough of that from overly optimistic and overly pessimistic traders.

      3
      March 3, 2020
      • David Emery said:
        I’d definitely accept that definition of “inertia”! And it makes more sense to me than “too many buyers/too few shares”.

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        March 3, 2020
  2. Charles Keller said:
    One can’t rule out that margin calls forced leveraged accounts to sell stocks that are easiest to liquidate.

    0
    March 3, 2020
  3. Manfred Schwencke said:
    PED, wasn‘t Neil an employed analyst rather than a „trader“ (before starting Above Avalon)?

    In general, Neil stands for very thought through analysis and good insights, one of the very few analysts really going into the matters instead of scratching on the surface.

    0
    March 3, 2020
    • From Neil: “Prior to launching Above Avalon in 2014, I spent seven years on Wall Street as a sell-side equity analyst.”

      0
      March 3, 2020
  4. John Konopka said:
    It is telling when you look at the Stocks app and the charts for the stocks on the left side are all almost the same. Clearly trades are being made for macro reasons, not based on hopes of future corporate performance.

    3
    March 3, 2020
  5. Kathy Corby said:
    Beg to differ. This market bloodletting reflects a fundamental event in the real world. The market was slow to realize what medical professionals have known, and feared. This virus is horrifyingly contagious, unusually deadly, and will affect both supply and demand worldwide. The FED knows that, and now the market knows that– although maybe not well enough. Everyone here should know that too.
    If 40% plus or minus of the affected population of the world is infected (as many experts expect), and the fatality rate is 2%, with 15% of affected individuals needing hospitalization, we are staring havoc in the face. AAPL valuation will be the least of our concerns, I am afraid.

    2
    March 3, 2020
    • Jacob Feenstra said:
      @Kathy Corby said: “If 40% plus or minus of the affected population of the world is infected (as many experts expect), and the fatality rate is 2%, with 15% of affected individuals needing hospitalization, we are staring havoc in the face. AAPL valuation will be the least of our concerns, I am afraid.”

      You are totally right that by and large the affects of the coronavirus have been trivialized–also in this group. I emphatically agree with your last sentence.

      I’m not a medical expert (as I think you are) but I am a part-time M&E (monitoring and evaluation) guy in my organization. That statistic of 2% is a misreporting. Not sure where that came from. It’s probably an optimistic figure that dates back a month ago—but every journalist seems to echo that figure. Jerry Doyle is right that is closer to 3.4%. But actually that figure is optimistic too, because it is the percentage of those that have died among all those infected. However, a better statistic is to look at those recovered from the virus versus those who died. If we apply that principle, the death rate is close to 6%. Meaning, based on the figures we have now, when things have ran its course, 6 out of every 100 infected have died and the other 94 have recovered. That’s some 45 times more deadly than the common flu in the US (the US figures I trust better than the worldwide figures).

      If you’re a praying person, it’s time to pray, rather than worry about AAPL. I have no doubt AAPL will recover sometime in the not too distant future, but will we? (He wrote from Asia, preaching to myself as well.)

      1
      March 3, 2020
      • John Konopka said:
        Appears to be a good source of numeric updates:

        https://covid19info.live

        The population I referred to may have been a bit too large. If you restrict the infected region to just the Wuhan city center it is about 7.5 million.

        https://en.wikipedia.org/wiki/Hubei

        This results in an infection rate of 0.89%, assuming the infection numbers are accurate. This is important because presumably the virus in Wuhan was being spread without mediation before its discovery so this number should be on the high side. Other places that are better prepared should see less infection, one would think.

        1
        March 4, 2020
    • John Konopka said:
      @Kathy Corby said: “If 40% plus or minus of the affected population of the world is infected (as many experts expect)…

      Do you have a source for that?

      In Wuhan there are about 55,000 infections. Even if we double that to 100,000 then out of a population of 11 million that is a rate of 0.9%. Clearly this is a rough calculation and dependent on a lot of details, but it is far less than 40%.

      On the other hand, 3.4% of 40% of 11 million is about 150,000. The best number I could find today is that less than 3,000 have died in China. Terrible, but a far smaller number than 150,000.

      I’m not knocking you, just looking for clarity.

      2
      March 3, 2020
      • Jacob Feenstra said:
        Yes, personally I would doubt that figure of 40%, assuming that the slowdown of spread continues and assuming that there will be a medical solution in the pipeline.

        1
        March 3, 2020
  6. Jerry Doyle said:
    @Kathy Corby: “… This market bloodletting reflects a fundamental event in the real world.”

    I agree fully with Kathy. I am beginning to sense that the FED and domestic professional health officials responsible for containment of the virus now see as a worst case scenario a United States where certain cities, geographic regions, could become another Wuhan.

    World health officials said today that the mortality rate for COVID-19 is 3.4% globally, higher than previous estimates of about 2%. Specifically, “….Globally, about 3.4% of reported COVID-19 cases have died,” WHO Director-General Tedros Adhanom Ghebreyesus said during a press briefing at the agency’s headquarters in Geneva. In comparison, seasonal flu generally kills far fewer than 1% of those infected, he said.

    WHO officials say they don’t know how COVID-19 behaves, denoting clearly that it’s not like influenza. They added that while much is known about the seasonal flu, such as how it is transmitted and what treatments work to suppress the disease, that same information is still absent when it comes to the coronavirus.

    WHO officials are explicit. Here is their own language: “….This is a unique virus, with unique features. This virus is no influenza,…. We are in uncharted territory…. We have a disease for which we have no vaccine, no treatment, we don’t fully understand transmission, we don’t fully understand case mortality…”.

    If public officials fail to contain the virus, then we could see school closings, companies cancelling employee travel, canceling meetings, conferences and events, companies telling employees not to come to work and as appropriate, for employees to telecommute from their homes. All this will affect hugely, the travel industry, the service and hospitality industry, retail commerce, education from primary to higher ED, on and on. It could be total disruption of the domestic economy concomitant with total disruption of other world countries’ economies. All this brings on a global recession. This is the fear of the Central Banks of the world.

    Under the scenario I described above, few folk are going to be thinking about buying Apple products. Not all folk are retired, or have the professional skilled jobs as you who read these words. If you work, you most likely have sick leave, discretionary monies and savings, and the ability to sustain for a period. The vast majority of workers have no such personal benefits, live paycheck to paycheck and in such a scenario described above, they will not be thinking about retail commerce. They will be thinking about survival because many will not be drawing a paycheck.

    The above is the worst case scenario. It is, though, a possible scenario. Like Kathy C, I believe that this is the underlying concern that the markets (and some of us) are beginning to confront. Personal fear will be a powerful antidote for people to isolate themselves from others. Commerce suffers if this happens.

    Having stated the above ominous scenario, which I pray does not happen, the one silver lining is that in the coming weeks you may have the opportunity to pick up Apple at bargain basement prices.

    2
    March 3, 2020

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