Sell FB to buy AAPL, or AAPL to buy FB
An interesting see-saw price action has developed between shares of Apple (AAPL) and Facebook (FB). When Facebook stock goes down, Apple stock goes up and vice versa.
Going into the Facebook IPO, it made sense that investors were selling Apple stock to raise money to buy Facebook shares, but when Facebook did not open as high as some had hoped for, investors started selling Facebook and putting money back into Apple. When Facebook broke the syndicate bid at $38, the floodgates opened and money poured into Apple. As the chart shows, Apple staged an explosive rally.
Today, Apple opened strong, and went up in the morning, but when Facebook shares stabilized, money started pouring into Facebook and Applestock started falling. It's like the popular Whac-A-Mole game in which smacking one mole's head causes another to surface from its hole.
It appears that some investors are placing bets that Facebook has bottomed and they no longer need the security of Apple.
I carefully watch money flow. The inverse relationship between money flows into and out of Facebook and Apple is uncanny. It appears that the pattern that was started by humans of buying Apple and selling Facebook and vice versa is now being mimicked by machines. From a micro level trading perspective, machines may as well now be in control of these two stocks.
From a business perspective, the closest relative of Facebook is Google (GOOG). Both companies are in the business of social networking. More importantly the prime source of revenues for both companies is online advertising. Both companies are facing the same challenge in the mobile space as mobile advertising has not proven to be very profitable.
A trading correlation between Google and Facebook similar to what is happening between Apple and Facebook makes more sense. However, no correlation between Google and Facebook is as strong as FB-AAPL.
The foregoing indicates to me that Apple stock is over-owned and at least a good chunk is in the hands of investors who are not fundamentally oriented. This is a red flag for long term Apple investors.
The implication for investors is that neither Apple nor Facebook are now trading on fundamentals. In my experience, such situations are not uncommon in the history of trading and can sometimes last weeks. This is a paradise for short term traders but warrants caution on the part of investors who hope to hold these stocks for any length of time.
About Me: I am an engineer and nuclear physicist by background. I have founded two Inc. 500 companies, and have been involved in over 50 entrepreneurial ventures. I am the chief investment officer at The Arora Report, which publishes four newsletters to help investors profit from change. Please feel free to write me at Nigam@TheAroraReport.com. Follow me here and get email notification when I publish a new article.
Full disclosure: Subscribers to The Arora Report are long Apple from $131 and have taken partial profits at $360, $525 and $629.
