LOVE AND HATE IN THE STOCK MARKET
This article also published on thestreet.com
The financial markets have the ability to take the most common of human traits and take full advantage of them to an extent that would even make P.T. Barnum look away in embarrassment. All the common emotions that we rely on for our day to day survival, often times end up costing us our wine and cheese money on the alternate planet known as Wall Street.
The emotions of love and hate play an important role in determining the what, how and why of a stocks behavior. Ask Senor Average, who invests with XYZ Brokerage, whether a stock that is loved by the masses should outperform a stock that is hated and questioned by most. Invariably, Senor Average will tell you that love will win. Love for the companies products, management and brand will end up trumping anything a company that has been cast in a suspicious light can produce. Love beats hate in the stock market.
Arguably, there is no greater love that exists on Earth today than the love for AAPL. People of the modern world, after all, spend more time on their IPAD, IPHONE or listening to their IPOD than with their children, spouses, pets or mistresses. The threat of not having any of these devices for any period longer than that spent in a state of sleep, far outweighs any threat of not seeing friends or family for days or even weeks.
Therefore, it only makes sense that if and when the markets decide to pullback, AAPL wouldn't suffer nearly as much as a stock that doesn't have the cult fanfare or the mass following. And there's the trap, it makes sense. Whenever something "makes sense" in the eyes of Senor Average and therefore, in the eyes of a majority of investors, it becomes the markets responsibility, duty and privilege to take full advantage of those who believe in putting their money into "making sense" investments.
What doesn't make sense in today's market, as one example, is NFLX. Here you have the opposite emotions of AAPL. NFLX is a company that is looked at as being easily replaceable. It is also a company that is seeing its valuation questioned daily, as well as its long-term viability in the media marketplace. A company that sees its stock price shunned, as if it were a green ogre, attacking a helpless village. Quite the opposite of the make-out session we see between investors and the princess - AAPL.
These expressions of love and hate come in form of buys and sells in the financial market. The love for AAPL is expressed through an abundance of investors, few remaining short sellers, and fewer still, those investors waiting on the sidelines to deploy their funds into the stock.
It's a wonderful mix of investors while the market is in a pedal to the floor bull move, as we have now. But where does that leave AAPL when the financial markets decide to shake the tree a bit, as is common in every bull market cycle?
Imagine a 280 pound, muscular linebacker trying to climb to the top of a tree using branches that can barely support his weight. As he climbs further up the tree, the branches either weaken or just break. Yes, he's elated to be at the top of the tree. However, the problem arises when he attempts to come down. There is no support remaining below him as he either weakened the branches as a result of his quick ascent or broke them completely, leaving little in the way of support on the way down.
AAPL, with its cult following, who have absolute conviction in the validity of the company regardless of market cap, has very little in terms of support when it chooses to climb down from its current lofty heights. Those who have been wanting to invest are already invested. Those short sellers, who would normally be there to support the stock as it descends, have been largely rinsed from the picture. You can see this imbalance in the chart picture perfectly whenever AAPL suffers a down day. There is a vacuum of bids that creates a lack of solid support.
NFLX, on the other hand, with its exquisite ability to generate heaping portions of skepticism, questions and snide remarks regarding its stock price has seen quite the opposite investment crowd. With NFLX, you have mostly new investors, battered short sellers, and a host of potential investors who have one foot in the non-believer camp and the other in the "I'm kinda starting to believe" camp.
This creates a support dynamic for the stock. It's a dynamic that I outlined in an article earlier this month. The fact that skepticism and to some extent - hate - is the current attitude towards the stock makes it more resilient, as it allows for a more even weighting of buyers and sellers in the marketplace. Like AAPL, this dynamic is demonstrated very clearly in the chart for NFLX, as its demeanor during pull backs is far different than that of AAPL.
Don't be surprised when we do experience the fateful correction that is long overdue, if you see love punish investors, as it often times does. At the same time, don't be surprised if you see hate cause enough scurrying and shifting amongst investors that it creates a pillow of support that love could never dream of.
