What You Can Learn From The Pile-on Effect

When I say a lot of news is already known to a select group of people, I'm including official news. Just as there are typically signs when a stock is going to make a big move—indications in the form of daily volume, directional bias, and relative action (i.e., the stock versus the stock of rivals or indexes that cover the industry)—there are also signs when a big media piece could be brewing.

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Moreover, there are often times when there are so many nega­tive articles and scuttlebutt on a company that one wonders if there isn't a collaborative effort to help or harm the share price of a specific company. Cynics who have been on the Street for years call these stories plants, deliberately published to drive a stock lower or higher. For the most part, planted stories are designed to drive stock prices lower.

The topic is coming further out in the open because of the ir­reparable harm that was done to many publicly traded micro-cap stocks (companies with market capitalization of less than $100 million) in the late 1990s and early part of the new millennium. Most of the micro-cap stocks were hammered relentlessly by short-sellers (folks positioned to profit financially when the share price went lower); as the broader market tumbled they were to­tally decapitated. The shorts got a lot of help from dubious Web postings, magazine articles, and other negative news pieces in various media.

In the meantime, those micro-cap and small-cap companies (companies with market capitalization of $100 million to $500 mil­lion) had no voice and were driven out of business, because their share prices became so low they couldn't take advantage of being public. They couldn't raise capital or generate wealth for them­selves, the company, or the shareholders.

Now larger publicly traded companies are complaining about similar shorting programs designed to derail their share prices long enough for shorts to make money. Don't get me wrong; short­ing is a great way to make money and to hedge your portfolio. Plus the short crowd is infinitely smarter than the long crowd. But the shorts who spread false rumors and get suspect things pub­lished (whether true or not) to help their case are hurting the in­tegrity of our equity market.

One big-name company that is a great case study is Apple Com­puter (stock symbol AAPL). Apple Computer is the quintessential success story, founded by Steven Jobs. The company has been a trailblazer from day one. Yet, like most technology companies that have burst on the scene in the past couple of decades, there have been periods when the company had to deal with the challenge of a new mousetrap. Or, to borrow a Silicon Valley term, the com­pany found itself in need of a killer app.

The rise in the share price of the company reflected its unique connection with customers, which in turn resulted in unbridled fi­nancial success. Shares were trading at $3 at the start of 1998 and by March 2000 were changing hands at $34 a share. Then the mar­ket fell apart, demand for technology from businesses and con­sumers waned, and the stock began to slide, too.

The company's shares finished out 2000 trading at $7.43 and then the stock was cast into a period of purgatory. Occasional the stock would move up, but mostly the shares traded sideways, as the company seemed to morph from a technology business to a design business. Their stuff had always looked sleek and hip, but the technology prowess was missing—there wasn't enough steak to go with the sizzle.

And then it happened: The iPod was spawned, and it was the perfect marriage of design and function.

The stock took off from January 2004, when it was trading at $10.70, and hit a high of $75.50 by January 2006. The ability to come up with a second act is a big deal, as F. Scott Fitzgerald would attest. Apple had a small audience of nerds but is now a global force whose products are coveted by all. The stock was a phenomenon, too, and caught the attention of the shorts.

The stock began pulling back and struggled to gain any upside traction, falling into a classic down channel, forming a series of lower lows and lower highs. The shorts were in control and obvi­ously they had to keep the momentum going.

There was a series of positive news and the action in the share price in June hinted at a possible reversal of the six-month-long slide. That's when some would say certain articles and observa­tions were planted to make sure the stock didn't reverse trend.

Whether these articles or comments that pressured the stock were planted or not, I don't know, but the timing was very fortu­itous for the shorts. It should be noted that the short position in the stock climbed to 22.6 million shares in June from 17.6 million shares in May.

June 22, 2006, there was talk that Best Buy was on the verge of offering a wider array of Apple products, especially the Mac (per­sonal computer), which the company hoped could ride the coat­tails of the iPod. The news sent the share price of Apple through the top of the channel, which you now know is more often than not a "buy" signal.

On June 23, the very next session, momentum was exhausted af­ter the stock crossed $60 and the shares closed near the low of the session.

On June 26, the shares opened under pressure as an article in the weekend version of the Wall Street Journal questioned the trans­parency of the company and indirectly insulted the intelligence of shareholders as folks willing to buy at the word of management. I took the weakness that ensued that next Monday session as an op­portunity to mention the stock as a long idea to my clients, as I just didn't buy in to the notion that the company was any more secre­tive than any other. I certainly didn't buy in to the notion that there was a nefarious motivation behind this veil of secrecy.

The stock climbed ever so slightly off the canvas as the session went on. It looked like the entire episode was over and the stock would pick up from the upward momentum created the week be­fore.

On June 27, the share price of Apple got slammed, and without any apparent news, the stock stumbled hard.

On June 28, an analyst from American Technology Research came out with a note that Apple would have delays in two highly anticipated products, the new Nano and the widescreen video iPod. The stock moved to its lowest point of the year.

What is very interesting about this onslaught of negative opin­ions and questions about integrity is that there was a real problem that was never mentioned. All the hunches centered on execution problems and corporate secrecy. None of the finger-pointers seemed to know about Apple's impending option-backdating scandal, which was significantly more detrimental to the integrity of management than some short-term product delay.

On June 29, at the close of trading, Apple revealed it was launch­ing an internal probe of how it disturbed its stock option rewards. The company was the latest in a long line of companies that may have backdated options to generate maximum profits for insiders. The practice is illegal.

By June 30, the stock, which had closed at $58.97 on June 29, fin­ished the session at $57.27.

By July 17, the stock had reached a low of $50 a share.

During this meltdown period there were other negative stories about Apple. The pile-on effect was in full operation. Needless to say, I had a serious problem on my hands trying to convince clients to hang in there. I lost one large client but gained the trust of many others as the stock began to rebound. The public was about to see a series of reminders that management wasn't resting on its laurels.

An active trader should have been out of the stock on July 23, when momentum dried up and the stock pulled back ahead of a three-day weekend. Investors should have stayed the course, as there was never a change in the company's fundamentals.

The charts are wonderful tools, and each type of market partici­pant should use them. But be careful not to fall victim to deliberate campaigns to shake out the weak sisters. The weak sisters are those investors who are not well informed and are moving in and out of the market at the whims of each tick, a technique better suited for surfing than for investing in the stock market.

Obviously, the less you know about a company, the more likely you'll be one of those weak sisters. At this point in the evolution of the stock market, certain people with agendas that aren't nice know it's easy to get the average investor to become an unwitting accomplice in their schemes.

If you are using steadfast stop-losses, then you are going to be manipulated and sell stocks you should be holding. By the same token, you will also chase stocks (with undeserved high valua­tions) higher and get caught holding the bag. The last leg down in Apple stock was purely emotional. It was investors who never read the balance sheet, coupled with hot money that needed to de­liver results sooner rather than later.

Apple came back fairly quickly, shaking off lackluster news from rival Dell Computer and a general malaise at the time about technology companies.

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