Feelings Matter for Apple

 | Dec 24, 2013 | 10:45 AM EST
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To me, one of the most informative things in any market is how traders react when rumored news is confirmed. Some degree of "buy the rumor, sell the fact" is normal when sentiment is neutral. But if, as with Apple (AAPL) yesterday, confirmation of something that we have really known all along causes a jump in the stock, then I take that as one of the strongest positives.

Nobody could have been surprised by yesterday's announcement of a deal with China Mobile. It has been rumored for months that a deal was imminent, and a look at the six-month chart would indicate that most of the benefit was priced in.

Given that, AAPL's performance yesterday (+3.8%) was a good sign. Apple, you see, has a history of being driven by sentiment. People get really passionate about it. I wrote back in August of 2012 that AAPL may have been overvalued up around $700 and some readers reacted as if I had said nasty things about their children. I was told that I didn't know what I was talking about and one comment (since deleted) could easily have been taken as a veiled death threat.

Part of my reason for believing that the top was near was that the reaction to product launches and good news out of the Apple camp was becoming muted. Before long, the company that could do no wrong became the company that could do no right and the drop began. All of those people who had flown into a rage when I suggested that the stock couldn't keep going up forever disappeared and in their place were people who couldn't see the value of a hugely successful company with a single-digit multiple.

So, yesterday's price action was encouraging. When even well-rumored news produces a positive reaction it says to me that traders and investors are really looking for a reason to buy and in a sentiment-driven stock that can trump anything else, resulting in a few months of solid gains.

The fact is that however you look at it, AAPL has been undervalued for a while, but has recovered only slowly from the big drop. The deal with China Mobile announced yesterday ties up a loose end and improves prospects for growth going forward, but it would be fair to assume that, given months of rumors, most of that was priced in. The fact that the market still reacted positively to known news indicates that we are entering a period when sentiment is positive and that should result in a good first quarter of 2014, for AAPL at least.

I am sure that, to many of you, all of this talk about feelings and sentiment sounds wishy washy. You are more accustomed to articles that dig deep into incremental changes in margins and multiples of EBITDA, or that predict a stock's performance based on some centuries-old, somewhat-mystical relationship between numbers. Fundamental and technical analyses each have a purpose, but as somebody who has been paid a salary to trade, I can assure you that the pros know that nothing beats market sentiment. If you doubt me, consider if you have ever looked on in a puzzled way as something fell off a cliff and thought "Hmmm ... this should be going up!"

If nothing else, maybe in this Holiday season you should give sentiment a chance.

Merry Christmas!

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