Apple's Near 40% Collapse: A Lesson in Market Psychology

Just as major stock indexes are peaking, Apple (NASDAQGS:AAPL) is already in a bear market.

After hitting its $705 peak in the fall of 2012, Apple hit a fresh 52-week low today. The stock has now fallen 38% from its peak (20% price decline from high is generally accepted definition of "bear market")  to the $434 range. Meanwhile, the herd mentality of piling into what everyone else is piling into (as they did with Apple) is causing a lot of pain. "Common sense and careful logic show that it is impossible to produce superior investment performance if you buy the same assets at the same time as others are buying," said the great Sir John Templeton. Too bad nobody was listening. What do Wall Street's analysts have to say for themselves?

Before we answer that question, here's what their cheerleading chorus recently said about Apple:

"Wall Street Analysts Increasingly Bullish as Apple Hits Fresh Highs." - Wall Street Journal on 8/27/12"Apple seen as 'trillion dollar baby'" - MarketWatch on 8/21/12"Apple could be worth a trillion in one year" - The Atlantic Wire on 9/23/12"Apple: $1,111 per share and a $1 trillion market cap next year." - All Things D on 4/26/12"Apple $1,000 Not Half-Baked" - Jim Cramer at 4/3/12

Question: Has Apple's 38% bear market decline quelled enthusiasm for the stock on Wall Street?

Apparently, not because Factset wrote:

"Although analysts reduced their fourth quarter EPS estimates for Apple, they did not make significant changes to their ratings over this time frame. In terms of target prices, analysts did lower their estimates in aggregate by about 8%. The mean target price for Apple is $729.84 today, compared to the mean target price of $792.40 back on September 30. "In other words, Wall Street is just as crazy in love with Apple today as it was at $700!

Apple is still the #1 ranked stock within the S&P 500 with the highest number of buy ratings. Oddly, it's also #1 in terms of the largest percentage of upside difference between analysts' mean target price and its closing price.       

Here's the problem: Investors who got caught up in the emotion and bought at the wrong price, are getting creamed.

Apple is a major component of technology ETFs like the PowerShares QQQ (NASDAQGM:QQQ) and S&P Technology Sector (NYSEARCA:XLK). While technology stocks have managed a small YTD gain, they are still lagging all other S&P industry sectors long with the broader market (NYSEARCA:SCHB).

When Apple shares were trading around $650, we analyzed the frenzy and gave our readers specific support levels, that if broken, would spell trouble for the stock. In a research piece titled "Is Apple's Stock in a Bubble" written on Oct.5, 2012 here's what we said:

"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 bubbleof 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. Apple is in a decade long uptrend but if price were to fall below $600 that would be a sign that the 4 year uptrend in Apple has changed to negative." 

Apple's vicious decline is a precursor of what's ahead for the rest of the stock market. Watch out when a leading stock turns into a laggard in such a short period of time. In case nobody bothered to tell you, stocks always fall faster than they rise. The ETF Profit Strategy Newsletter uses common sense fundamental and technical analysis to identify key inflection points in ETFs tracking stocks, bonds, and commodities. This is how we find key trend changes, eliminate emotional decisions, and make profitable trades.