Apple is now the ultimate traders' stock
As it becomes sensitive to news, sentiment and short-term trends, the tech giant is less suitable for buy-and-hold investors.
Apple (AAPL) shares collapsed again Wednesday. Various explanations have been offered: competition in the tablet market, a lack of impact from the iPhone 5 and profit-taking for tax reasons are among the most popular.
I believe the last reason is the most significant. Apple has been the ultimate "buy and hold" stock for a long time. There are some significant long-term capital gains locked up in it. Uncertainty as to the tax rate on those gains means that even the most loyal shareholders are considering realizing some profit before year's end.
This is all very interesting and certainly worthy of noting, but of more interest to me is that the very nature of AAPL as a stock seems to be changing. It is becoming the ultimate demonstration of the market's herd mentality. It seems that whether it is moving up or down, there is no shortage of people saying that the move was inevitable.
Conviction is strong from both bulls and bears. It has become the ultimate traders' stock. This won't last. One side will win out, but for now it represents significant opportunities.
In the past it was difficult to pick levels. Any correction was small and short lived, without momentum. Since the April drop, however, a bottom has formed at around $525. You don't have to be a genius to see this on a basic chart.
This very transparency is what makes it attractive right now. Buying AAPL around current levels ($546.23 at the time of writing) gives an opportunity for a controlled trade, with a stop loss placed just below $500 to protect against a breakout and a target of April's high, around $630.
Of course, it isn't foolproof. You may prefer to wait until the year is over and profit-taking has finished, or wait to see support for a third time before concluding that a real bottom has been found. You may want to limit your potential losses by simply buying calls on AAPL. They are certainly cheap right now. January expiration $560 calls, for example, dropped around 45% yesterday to close at $19.15.
Whatever your preference, the fact remains that Apple stock is no longer a one way bet. It is possible to trade it with pre-determined levels in mind. This does raise questions for the long term. Could it be that AAPL is now behaving like a mature stock, becoming sensitive to news, sentiment and short term trends? Does this mean that growth is expected to stall? This could be so, but for now it seems that traders, rather than long term buy and hold investors are finding the stock attractive. It has become a traders' stock.
Copyright © 2014 Microsoft. All rights reserved.
New legislation is allowing foreign companies to finally invest in the country's vast oil reserves.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.