Every analyst is recommending AAPL. If an earnings P.E. for next year on continuing growth is 14-15 and earnings $70 per share, then the stock should be at $1000, right? This reasoning is why most fund managers don’t beat the market. They are programmed into believing the hypothesis (hype?) that great earnings are driving Apple’s stock higher and as long as the earnings improve it can only go up. However, that is not what is taking AAPL higher. What took the stock higher is the buying by large institutions. They have cornered the float after many years. They have been riding this gravy train and squeezing it for all its worth. Literally.
Arguably, one could say they are buying BECAUSE of earnings, but what happens when there comes a time where every institution has more than a slice of AAPL but a chunk and it represents too big a weight in their overall portfolio because its price has kept going up relative to other names?
Is it possible that liquidation can blind side these institutions while earnings remain robust?
The higher the parabolic advance of a huge capitalization growth name, the more likely an implosion becomes: it takes an ever-growing amount of money to hold up an ‘expensive’ stock. Once the point of equilibrium and saturation is reached, all the earnings in the world can’t hold up a stock. Newer investors start to lose and downside picks up as volume feeds on itself and momentum explodes.
While the hypothesis of earnings works well when a stock is going higher and higher, when the stock starts coming down and earnings are still “there”, it can create a lot of fear and paralysis as market participants' theories are undermined. There is uncertainty and investors hate uncertainty. They begin to wonder if the price of the stock is anticipating something they don’t know about the fundamentals and whether the ‘smart money’ knows something they don’t.
In reality, it’s what I said above, and once equilibrium is reached, selling can beget more selling as a virtuous circle becomes a potentially vicious circle and an American Beauty becomes an American Thorn in the market.