Apple Feels 'Max Pain'

Many of you are probably wondering what is going on with Apple (AAPL). They come off a historic product release, products are flying off the shelves, customers are in lines that extend for blocks waiting to hand over gobs of cash, and the media is abuzz 24/7 over Apple’s sheer brilliance. Yet the stock is stuck in the mud. Then to add insult to injury, Oil tanks three consecutive days and the markets rally, finally the Bears Capitulate. Yet, Apple is left behind. What gives.

It’s called the Max Pain effect. Max Pain is a theory that 90% of all people that purchase options will hold those options until expiration, and rendered worthless. So, there is a formula that figures at what price point will the maximum number of people lose money if they held their options until expiration. The Max Pain effect is the tendency for a stock’s price to gravitate towards this number as we approach the options expiration date.

As you can see from the graphic below, the max pain point for AAPL July 2008 options expiration is $160. Now, options expire today (Friday) after the closing bell. The price of AAPL over the past few days has moved towards the Max Pain number. Now you may ask, why hasn’t Google (GOOG), Research In Motion (RIMM) or Baidu.com (BIDU) experienced this same effect. Well, the answer is simple: their Max Pain points have all been above their trading price this week. So, they have been pulled higher, while AAPL has been pulled lower.

click to enlarge

This is not to discount the unfortunate earnings report from Google, and the subsequent drop in price after hours last night to 492.75 -40.69 (7.63%). Although Google had increased revenue by 35% over the same quarter last year, it missed on earnings by only a few cents reporting $4.63 a share, compared to analysts consensus of $4.74 a share. In a bear market, any kind of miss is not good. This combined with poor earnings from Microsoft (MSFT) and Merrill Lynch (MER), helped push AAPL down in after hours to 168.00 -3.81 (-2.22%). By the way, the rest of the horsemen were down too.

Now, I know my next statement is going to sound masochistic, but here it goes anyways. This earnings bomb is a good thing, it’s precisely what we want to see, because now, we get to test the strength of the move upwards. Will it hold, or crumple like so many false rallies before?

Today will be a big day, because it will tell us if the recent move up is true capitulation or just a bunch of hot air. With these poor earnings and GOOG, along with the rest of the horsemen giving up some big points, the Nasdaq will likely gap-down tomorrow. This will be a test for the emotions as well, especially if you have skin in the game. If you’re playing it tight and safe, like many of us in the Wilderness Group, I suggest you keep it that way, at least until the market reveals itself.

UPDATE: (Friday morning, June 18, 8:20 am): Futures are looking up, seems that last night’s earnings had little negative effect on this capitulation rally. I believe today is going to be a good day for Apple. I also believe the Gartner Group report on PC shipments portends another great quarter for our company, and that the lull in iPhone sales in the last 1/3 of this past quarter will have negligible affect.

Disclosure: Long AAPL

Comments

[will]

I've had it with Apple and all their bull. The stock gets manipulated everyday, Apple Leaderership does nothing about it while shareholders take a beating, and the process recycles the next day. It's so good to know when the going gets tough you can count on Apple to hide in their caves. Thanks Apple! Your the best.

[JW, PhD]

It's not up to the company or its leadership to cheerlead just because some investors don't have the stones to play this game. If you don't like how Apple operates, go buy yourself a nice safe mutual fund or a CD. Some people just aren't cut out for the market.

[Jerr2231]

It's a crooks game unfortunately. You can't invest in the market anymore you have to play it like a casino. Why do you think the market doesn't move anymore? It's because the crooks play it up and down like a casino releasing rumors and controlling the price. Eventually people will get sick of losing money and then something will be done because the crooks will start losing money, but for now I wouldn't invest in this market. Play the game maybe but you can't invest.

[JB Money]

Will. copy and paste your comment into your Palm Centro. Read it again after you get out of high school. Then take a a few business, econ, and finance courses in college and learn how companies and markets work and what they need to do to increase their EPS.

Let me know when you get the to the part in the book where it states management must come out and yell at people for selling their stock in a down market. Then try taking an investing approach with a time horizon of more than a few months instead of looking for a quick 50% on the money you borrowed from a cash advance on your credit card.

Nice post Zach.

[Jibbs]

Its fun to listen to people who first started "investing" in the markets in the late 90's whine when their stocks don't shoot upwards everyday. You better learn to "play the game", as you say, because blindly dropping money into the latest thing and expecting to double your money every month doesn't work anymore. A solid portfolio combined with strategies hedging your investments against a slide are needed. If you can't do this then hand it off to a Mutual fund or somebody else who can.

Very interesting post Zach.

[AMT]

Yes, "Will" probably didn't get out of kindergarten. Stocks fluctuate, as they've always done, and stock prices increase and decline in price, both long and short term, in response to earnings. There are millions, indeed billions, of transactions every day. Sometimes investors buy and sell on the same news, whether good of bad, but in the long run it is only earnings, and growing earnings, that count when stocks rise in price. "Will" is a fool -- and "Jerr2231 -- is close behind and both should put their money in a mattress rather than display their ignorance in print.

[Robcal1]

I for one completely agree with Will and Jerr2231. This year, when Apple dropped from 203 to 115, did Steve Jobs tell it's shareholders to "hang in there?" Hell no!!! He told his employees, the ones that take money from him, not give it. At a $1 per year salary, we're the ones paying his salary through stock value increases. How about every earnings report when Apple deliberately "sandbags" their earnings reports? With regards to the plunge of Apple earlier this year, Jobs said if he added to the bottom line, the top line would increase. Bullcrap!!!! YTD Apple is down 18% as of this writing. Jobs needs to subdue his megalomaniac attitude and learn how to act like a "real" businessman. Based on every earnings report this year, REGARDLESS of what's happening in the economy, there is no reason why Apple should not at least be in the 210-220 range, MINIMUM!!!!! JB Money, Jibbs, AMT, and JW Phd; you guys are in total denial. Everybody already knows how the market works, so save your macho crap! The management team at Apple is clueless and needs to get re-arranged, ASAP! $20 billion in cash laying around, and they don't even make an attempt for at least a partial stock buy back when it was at $115??? How about the unbelievable fact that after one year, they STILL have not signed a deal with China Mobile. How can you give these absolute morons any credit at all???? Jobs' ego and the management teams' unwillingness to stand up to that idiot is costing all of us, dearly.

[will]

This stock is manipulated more than our Oil reports. You so-called experts are real Wallsteet tycoons I see. As far as Apple is concerned, its stock is no longer the darling of the Nasdaq. In fact, its used more than toilet paper across the world. They kick it around like a rented mule. This stock is done. Takes your Iphones and go play your little games on them. This stock sees 150 Monday. I'm sure all you experts already know this and have bought puts for Apple, right. Have a nice day jokers.

[Robcal1]

Couldn't possibly agree more with you, Will.

[pabs]

another good article

[AMT]

How brainless can people be? And that means "Will," "Jerr2231", and especially "User42885," for his dumb comment that because Apple isn't today selling for $210-220 a share Jobs is not a "real businessman." Apple, led by Jobs, has merely introduced a device, the iphone, that has changed the nature of mobile communication for today and decades to come, and iMacs are selling like hotcakes. And let's not even consider that Apple has transformed the music industry with ipods and itunes, and dominates it today. But, according to the above named whiners, because the "market" hasn't driven Apple's stock price to the level that would satisfy their immediate, insatiable greed, no doubt fueled by buying on margin, the management team is "clueless." The level of ignorance about how markets work -- and sometimes don't work -- displayed by these remarks is breathtaking. Apple's share price has only gone up several thousands percent in value in the last seven years, but since it has fallen 18 percent in the last six months in a bear market -- much less than comparable companies -- the management should be taken out and shot. Please, "Will," etc., do everybody a favor and put your money in a mattress. Otherwise your significant others might have to institutionalize all of you and cost taxpayers a bundle. Be good citizens and get out of the market. You have no more business investing than a blind person has driving.

[Robcal1]

Jobs' should not be the CEO, he should be the head of the design team. He was fired once and should be fired again!!! And we're not talking about past performance, we're talking about RIGHT NOW!!! Now I say minimum of 210-220 because of the moving around of money for all of the other companies that have reported negative earnings. If not for the bear market, there's no excuse for not being above $250 per share considering the here and now and everything Apple's done this year. Obviously, our differing opinions is what makes a market. I think that most people publishing a post here are well aware of valuation, market conditions, technical analysis, and rumors. Besides Zach's excellent article, in many people's opinion, Apple is being whipped around unfairly. Regardless of the worthless leadership at Apple.

[michiganjake]

Monday night will tell the tale. Be patient, we may all be in for a nice upside surprise!

[Apple Heavy]

I would like to know the AAPL stock price will be helped if Jobs were fired. The possibility that he may leave for health reasons recently took the stock price.
There are an awful lot of traders who are pretending they are investors

[Apple Heavy]

.. a couple of words were missing....
I would like to know how the AAPL stock price will be helped if Jobs were fired. The possibility that he may leave for health reasons recently took the stock price down.
There are an awful lot of traders who are pretending they are investors

[iphonedied]

Amateurs follow AAPL just like their predecessors did with JD Uniphase in the dotBomb bubble. Apple is a consumer company trying to sell extremely proprietary consumer "stuff" in severe headwinds. There is no way that this stock will continue to hold a high PE until the economy brightens.

And the childish behavior of Apple Fan Boys whenever anyone questions their cult of personality demonstrates that buffoons are long in AAPL. I made a bundle off of shortin JD Uniphase, I made a bundle off of shorting AAPL in Dec/Jan and I plan to make yet another bundle as I am riding this pig down into nice short profits.

Cry in your milk Apple Fan Boy kiddies.

[Toni]

Ladies and gentlemen (a few), well below 170, like your good old Toni was telling you the past two weeks.

[JW, PhD]

iphonedied, the only ride you'll be taking is in the car you'll be living out of after you lose everything you own shorting AAPL. And those of us who have made a fortune being long since the turn of the century will maybe give you some spare change when we see you panhandling.

[Apple Heavy]

I hope you are shorting big today so you will squirm when you get squeezed.

[iphonedied]

JW,
Sure, sure, whatever you say. Long since $1.07, you've made how much profit selling at the highs?

You made my point about childish behavior very clear young boy.

[JW, PhD]

Toni [Comment edited for abusive language. Commenter put on notice], even a broken clock is right twice a day. In this case, more like a broken record, as 170 is all you've been able to post for weeks on end. You were bound to eventually be correct as AAPL has been pinned by OE and investors are waiting for earnings.

[iphonedied]

JW,
Keep it up. You are doing a Yeoman's job of demonstrating how childish the Cult of Jobs followers are. But we love ya, shorting is profitable but wouldn't be half the fun without watching the neophytes lose their shirts and piggybanks.

[AMT]

Robcal1 personifies ignorance incarnate in his assertion that Jobs should be removed as CEO because "RIGHT NOW" Apple's stock is going down a few points. Never mind that if his recommendation was heeded the stock would probably plummet at least 50 percent or more. So if Mutual Funds, Hedge Funds, brokerage houses and other major players in the market don't want to gobble up Apple today in order to drive the stock to his imagined level of what it deserves to be "right now," 250 a share, the best and most far-sighted CEO in the technology sector should be removed to satisfy Robcal1's delusions. Why it's "unfair" that many money managers are being conservative by holding increasing amounts of cash and are not following his advise and purchasing Apple stock at the "minimum" value he ascribes to it. How can they be so cruel to him and other short-term traders and those buying on margin? They want their 250 "right now", and if it doesn't happen "right now," then Steve Jobs should get the ax. Let's all be thankful that childish, impatient, grossly illogical people like Robcal1 are only in charge of their own investments, and are not asked to do anything to impact others. At least one can hope and pray that is the case.

[Toni]

JW, I was right, telling 175 was resistance (see yesterday action ?) and telling AAPL was going down considerably below 170 very soon (I would say today qualify).

I would not call you idiot today, is like firing on the red cross.

Pero' faccia come il culo te lo dico, va'.

[reagan]

JW, don't bother replying to idiots who slam Apple. Stay the course & down the road we will laugh at these dolts. Who knows, we might be surprised after the earnings call & be laughing a bit earlier.

[randyv13]

I'm really not sure where the criticism of Apple management comes from. Over the last few years they've introduced or updated several products that have sold through the roof; they've tripled their share of the PC market; increased PC sales at twice the rate of the rest of the industry; crushed earnings and profit estimates every quarter; used their caché to strong-arm component manufacturers into giving them incredible pricing to drive up their margins; and with their very first cell phone they instantly became the player to beat in that industry as well. They clearly haven't been resting on the iPod laurels that all the critics assumed they would as they predicted that Apple would basically go out of business when the music player market inevitably reached saturation; they did exactly what those of us who bought the stock early knew they would do - they created the next "insanely great" product.

Clearly, as a few here have hinted, this particular stock, being so prominently in the public eye, can be and is manipulated by a few unscrupulous "expert analysts." Apple's stock price, since it's traded by so many people with less trading experience, whips around like a coked up ferret every time one of these so-called experts says that Steve Jobs looks like he's dying or there are a million unsold iPhones in a warehouse in Sheboygan.

Zach's article is brilliant! He's hit it on the head. As in the oil industry, the big traders, mostly of the option variety, do everything in their power to manipulate stock prices from the intside while the rest of us are just along for the ride. A great company with sound fundamentals, an unprecedented history of innovation and product success should not be getting hammered like Apple has been, especially in the midst of one of the most successful product rollouts in history.

I do agree however, that Apple should have done a huge stock buy back when the price tanked at the beginning of the year.

[rihardm]

i have been ceo of a few large companies and i wish i could be ceo of apple for a few years. apple now has 8 % of the market and windows has 92%. if there was a ceo without the love of his baby first in his mind (steve jobs) then he might make it alot easier to have the windows projram on his system instead of treating it like a bad addition that the people in the stores frown when you ask how to make the windows work, most of them say : I DON,T KNOW WE DON,T DO THIS HERE! i love the apple products. i prefer to use apple. i think there system is the best for what they do, but i also have 12, 30 inch screens and as many of you know if you trade stocks or do many calculations or download things from different companies you must have windows! therfore if i was ceo of this company i would promote and feature as the first line system when you buy a apple computer, and talk about how much faster and better it operates the window system then other products on the market and as a extra feature you have the apple system the best of bith worlds. the apple share of apple would go up and the stock could be 600 instead of where irt is today. once these millions of people have the system in there homes and offices they will then find out how much superior the apple system is for some programs. i do not think the father of apple has the heart to do this as the founder of this superior system and as brilliant as he is the potential for his company has out grown what his human ego can allow him to do.

[JW, PhD]

reagan, trust me, I'm already laughing at idiots like Toni and the rest...laughing all the way to the bank.

iphonedied, you don't have any room to talk about childish behavior given the screenname you've chosen to use. Only immature punks choose to troll as you have in this thread. As far losing MY piggybank, AAPL has paid for a beach house and Bentley for me over the past 9 years, so I'm not too worried about whatever pennies daytraders like you manage to scrape up every now and then, it certainly doesn't affect my net worth. But have fun playing your little games trying to move up in the world, maybe someday you'll know what REAL wealth is.

[reagan]

2009 will be an unbelievable year for those who have patience. When China, India & Russia start selling the iPhone, look out. Munster won't be far off his prediction of 45M units sold worldwide. With all of the other revenue streams for Apple, who knows where this company is heading. I know for one thing, it ain't going south! Apple isn't even scratching the surface,boys(and that goes for that little girl, Toni).

[reagan]

Go away little girl, Toni......

[Toni]

Go away big dummkopf, reagan......

[Zach Bass]

Please! Gentlemen, let's be civil and dispense with the rhetoric. The comments were going so well, I'd hate to see this thread end on a sour note.

[Toni]

Gentlemen ? It's impossible to say something negative on Apple, or saying "it's going below 170" because common sense and T.A. are telling you so. Someone could use that and plan for a better entry, say "thank you, you were right!", but no.

It's full of full blown haters who start telling you "short! die!", "I'm rich!", "hope your short will kill you", and the like. A bunch of stupid blind people.

Sorry Mr. Bass, I won't be civil to this lowlife.

My post was:

"Ladies and gentlemen (a few), well below 170, like your good old Toni was telling you the past two weeks."

Was that too rude ?

People IS filth, for the most part, you must accept that and live with that, or block posting. I suggest you to ignore the noise or start banning, if you can. Well, I can tell you you can't. Not me, anyway.

Peace

[Apple Heavy]

"Was that too rude ?"

No, but it appeared as if you are gloating at the fact that Apple, which has not yet reported is being tarred with the same brush which tarred Google and RIM for missing and/or guiding lower.

[ND]

We all know what will happen next week. AAPL will beat expectations and then kill the buzz with overly conservative guidance. The stock will go down. Frustrating for sure, but no problem for the long run. They've done this for years and still continue to grow. It would be worse to guide high and miss. Apple's biggest problem is the unreasonable level of expectation placed upon them. They are correct to try and temper it with low guidance.

[try again]

What if...Apple's TRUE expectations for the coming quarter were SOoo high that even with their normally conservative guidance they'd still be comfortably above Wall Street expectations? One million phones sold in less than three days . 50 More countries gearing up. Mac sales up 38% YOY. Ten million IPODS. APP store. MobileMe. ITunes. How can they NOT give good guidance?

[Robcal1]

Well Zach, looks like the recent rally was a bunch of hot air. Your thesis stated that today would be a very important day to test the market; it failed again. I wish you weren't wrong about Apple having a good day, what a disaster!!! Even if earnings are good, it's going to be awfully hard to break past where the stock has been trading for over two months now. But if it's a good report, it'll get back above $200 within the next month for sure.

Now to the good stuff.

To AMT: Am I delusional that Apple is down almost 19% YTD as of today's close??? How can this be??? Macs, iPhones, iPods, and notebooks are literally flying off the shelves. So who's to blame??? In my opinion, Apple's stock is being punished because Wall Street isn't seeing what they want to see out of management. Partially, for the reasons I've already listed in my previous post and partially for reasons I am unable to identify. I don't care what you say, these reasons cannot and should not be ignored. Apple management has lost their touch. Yes, they were great when they were under pressure after the dot com boom. They were great when the iPod excelled. But that's ancient history. What have they done for all of us lately??? We all see their success and we back them up with the ultimate optimistic gift; we invest our hard earned dollars in their company because we love their products and we believe in their company. Isn't that what capitalism and being an American is all about? Now I'm a long term Apple stock holder and I agree that maybe some traders get easily bent out of shape cause they're in margin. Oh well, too bad, deal with it. But we must keep a close eye on management, they must be held accountable. Are you really willing to accept the fact that it's okay that Apple's down 19% YTD and chalk it up to market forces or the like. Take a look at the post by RIHARDM, a former CEO. He said he'd have this stock flying at around $600 per share. Could he really be that wrong, given the incredible success Apple's shown over the past year??? Yes, we all know that Apple would take a major hit in stock price if Jobs was ousted. But when do you say enough is enough??? His ego is killing us shareholders, slowly. Do you think Larry Ellison would have allowed this crap to happen if he was CEO? NO WAY! That pit bull would have taken Apple to new highs with the kind of success Apple has had so far this year. Thus the difference between a CEO and a someone who clearly isn't qualified for the job. Jobs is great for innovation, design, and presentations. Nothing else.

[reagan]

Lowlife? I think we all know who the "lowlife" is on this blog.

[Apple Heavy]

Last time I looked, ORCL was below $22 and has a lower market cap than AAPL, and Larry would do a bettr job than Steve? Give me a break!
Dow and NASDAQ are 20% down for the year and people whine about AAPL being punished because of the general malaise and poor performance by RIM, Google, and Microsoft!!

[nietschele]

What poor performance by Rimm?
Do you just mean that the stock is off its highs. . . just like AAPL?

[nietschele]

What poor performance by Rimm? Or do you mean that that the stock is off its high. . . just like AAPL?

[Golden Apple]

Okay just finished reading to all you people. We all have one goal. To make money. So lets not fight. I personal do believe that Apple is a GREAT company and they rock! But, todays investment market is different from 20 or 40 years ago. If you want to Short then short. If you want to Long then Long.

[blah-blah]

AAPL's chart is terrible, I wouldn't be suprised to see the thing hit a wall on the fundamentals the way GOOG is heading.

Why anyone would put money in this is beyond me

[JW, PhD]

Robcal, did you even READ Zach's article? Do you have the first clue what max pain and OE are? Every post you make here reveals your ignorance even further. Why not quit while you are behind?

[digivision]

" Jobs is great for innovation, design, and presentations. Nothing else."

and that is why we love him and why Apple is the great innovating company they are....

[David Lentz]

Great chart and explanation, Zach. Ever consider creating a daily 3-D chart with time and strike price as the x & y dimensions, and making a little movie of the daily changes to that chart? Following the ripples in such a space would be most interesting. It might even illuminate some profitable strategies.

Thanks again for this post.

[ND]

As Steve Jobs often says, Worry about the top line and the bottom line will follow. He doesn't care about making money for the daytraders. He just keeps growing the company until we patient types finally get the big payoff.

[Kontra]

Sometimes folks do not quite realize just what a huge risk Jobs & Co took in 2005 to start the iPhone project. I explored 15 bet-the-company level risk factors in:

iPhone: The bet Steve Jobs didn’t decline
counternotions.com/200.../

[rihardm]

i am sitting today with mamny thousands of shares of apple if this stack breaks below 64.00 on a closing i will sell all my shares and go short. i hope that i will be rewarded for holding on as part of me believes the stock can see 192.00 again if the earning are fantastic and more importany iof the management talks up the next quarter instead of holding out until year end when bonuses and stock options are generally a reason to have a higher price then now. as a chart reader 64.00 is a very important range to hold on a closing basis i still believe this company can be 600.00 a share if they graduate from there nitch and enter the world wide windows network with force and the cash they have , while continuing to develop with outside programs their superior mac systems. this will take several years ans as more people, businesses and countries use there apple/ windows systems side by side on one computer in the end with everything else they can offer( total life style systems with one company ) they will surpass micro soft in numbers and users.

[Robcal1]

Hey JW, Phd. I CLEARLY understand what the article is all about. Just like I CLEARLY understand this weekend's post by Zack about how AAPL's direction is being manipulated by the "will" of the big boys. Like most of us Apple investors (long term), Zach is blown away by the continual BS we receive from the big boys. Why don't you try refuting any of the points I've made in my posts? Back up your claims of my supposed ignorance with actual facts! Are you also saying that Zach is ignorant for being just as bewildered as I am?

@ Apple Heavy: I clearly said in my post that if Larry Ellison was in tact as Apple's CEO with the SUCCESS that Apple has had (not Oracle); the stock would DEFINITELY be much higher than it is today. I stand by that statement 110%.

My overall point is this: How can Apple be down this badly YTD when they CONTINUALLY beat earnings estimates and defy everything that the media is telling us about the markets and everything that IS happening to the markets? Their fundamentals are excellent! But the market sucks. Like I said before, I understand selling off some Apple shares at some point this year due to the severity of the crisis we're still going through. But at the end of the day, are the big boys ever going to choose to notice the lines at AT&T and Apple stores for iPhones? How about the incredible sales figures of Macs? In my opinion, Apple is and will be the greatest growth story of the next ten years. We're now over 6-1/2 months into this year, I hope that the big boys start to wake up some time soon. Cause if Apple doesn't go up, there shouldn't be any hope for ANY stock!

[Apple Heavy]

"I clearly said in my post that if Larry Ellison was in tact as Apple's CEO with the SUCCESS that Apple has had (not Oracle); the stock would DEFINITELY be much higher than it is today"

So, the CEO dictates or controls the stock price ??!!

[Robcal1]

Apple's stock has especially been tested this year. Jobs and the management team have continually failed us shareholders. For example: Jobs still hasn't signed a deal with China Mobile. Why not? I think a guy like Ellison would have negotiated a deal last year. Yet we're still waiting. How about Oppenheimer constantly screwing up the guidance. Jobs consistently allows this to happen. How about the buyback that never happened when the stock dipped to $115? How about a single word out of anyone from the management team to say something, anything when the stock dipped to $115? Yet Jobs tells his employees to "hang in there," the hell with us shareholders. If a guy like Ellison had been in place since January, I believe he would have "shaken things up" through all of this and the stock would be much higher, as it should be.

[Mac'em X]

If Apple ever shifts focus from creating great products to dicking with its short-term share price to please whiny investors, I'm out. That would mark the beginning of the end.

As long as Apple stays focused on those great products, without a care for shareholders beyond "just be quiet and hang in there", I'll stay a happy investor. That stance is what's going to bring the patient investor a fantastic reward.

[Robcal1]

You don't get anything!!! You have not once given any response to the facts I've continually listed. I'd like to see you talk smack in my face, punk! If anyone's ignorant it's YOU!!!