Dare to short AAPL?

These days, you’d be crazy to even think about shorting AAPL, right? They just had killer earnings and are on track to earn $40+/share in 2012, giving them a nice, comfortable valuation. However, the charts point to the notion that a long-term top is right around the corner.

First, on the monthly chart above, note that AAPL appears ripe to complete a 5-wave rally that started in 1998! I would expect a multi-year correction to ensue soon based on this chart alone.

On the weekly chart, you can see that Wave-V from the first chart has subdivided nicely into 5-waves as well. Even on this shorter timeframe, the wave pattern indicates that upside is limited.

 

The daily chart shows a typical parabolic blow off to finish Wave-V. Importantly, recent price action is confirming that a top is very near:

During a climax top, a stock leader that has risen for many months will suddenly take off and run up much faster than it has in any week since the start of its original move. On a weekly chart, the spread from the absolute low to the absolute high of the week in almost all examples will be wider than any price spread in any week so far.

- William O’Neil in The Successful Investor, pg. 80

This weekly candle is on track for being the largest weekly gain in dollar terms, ever. Furthermore, we’ve seen 5 straight days of gains, with today’s price action including a large gap up followed by a large rally. This is typical blow off action, and it implies that the market is becoming too one-sided to sustain further long-term price rises. Look for a multi-month or multi-year correction to start soon.

NEP could be a BUY

1.5 years ago, almost to the day, I projected that NEP was nearly at a peak, and would suffer poor returns for the following 2-3 years. Unbeknownst to all the investors, there were several negative developments that arose from NEP, including accounting problems which led to a trading freeze and near delistment from the AMEX. As I anticipated from the charts, volume, and sentiment, price has since performed extremely poorly, averaging returns of –60% annually. All things come to an end, however, and NEP seems to have weathered the storm. It appears attractively priced, and I’m buying around $3. Here’s why:

1. NEP had $75m in cash as of 3/31/11, and currently has a market cap of $105m. If the auditors are not lying, then this is a pretty good valuation at which to buy NEP.
2. The accounting issues that plagued NEP are out of the way.
3. The lawsuits which sprung out of the trading halt and claimed that NEP breached its fiduciary duty to its stockholders have been dropped.
4. Volume is mostly down-trending as price declines (see chart below), indicating a decreasing level of interest in the stock. This is preferable to seeing volume increase as the stock tumbles which indicates lack of confidence in the company.
5. There was a significant basher article by “Bigfish” research which cause the stock to drop significantly on volume of about 3m shares). Then, the next day, there was a massive short squeeze on 3m shares as well. This price action is simlar to what happened in Dec 2009, except opposite (see chart). Back then, price spiked up in the direction of the uptrend on 3m shares, reversed violently the next day on 3m shares, and then proceeded to retest and exceed the previous highs. Now we’re seeing the same pattern. Call me paranoid, but it seems like someone is playing those spikes, and it tells me that we’re near a turn.
6. Finally, from an Elliot-wave perspective, we had a complex 3-wave down trend (see chart). This tells me that we could see a basing pattern and a rise out of NEP.
7. I conclude that NEP’s return prospects going forward are now positive.

Taking a Bet with NEP

Back in Jan, 2010, when NEP was rising exponentially, I made several posts clearly explaining that price would soon top, and that it would start a downtrend and poor returns going forward. I think NEP’s intrinsic value is between $9.70 and $13 (using 24% or 15% discount rate, respectively) so today I’m taking a risk and purchasing some shares into the recent downtrend, with a stop @ 4.77.

You can see on the 3y daily chart above that there is a very long-term trendline which has supported price action ever since it broke higher with the news that it was uplisted to AMEX. By going long here, I’m betting that the trend will continue, and that NEP’s management will get its s*hit together and correct the company’s financial statements! Regardless of what happens, though, if price breaks below the trendline and goes below 4.75, I’ll take a loss and stop myself out, as this would indicate a longer-term trend reversal.

NEP’s Volume: Something to Consider

You can see here that I was bearish on NEP’s price prospects while it experienced a massive parabola. We’ve now seen a 34% drop since the high. I am not sure exactly what will happen on the short term, but I wanted to share an observation that I take as bearish for the continued longer-term prospects for this stock’s price.

Above you can see NEP’s monthly chart. There are two striking features. First, notice that December’s volume was about 27m shares, approximately equal to the company’s entire outstanding stock. Based on the massive breakout, one might argue that because November closed above $5, institutions bought this stock in quantity (the ENTIRE company) which was responsible for the huge rally. So, following this logic, it would be bullish since large players are accumulating this stock.

Well, one month later the picture has flipped 180° in my opinion. January’s volume came in higher than December’s, and the month closed at a lower price than it did in December! What this tells me is that someone (or group) successfully executed a manipulation of this stock to unload a massive position above $5. The up move attracted enough retail/public buyers that the shares could be distributed well above the breakout point at a nice profit.

However, we have not yet seen many high-volume down days. I believe these are yet to come, and may be accompanied with more Form 4 filings. In fact, according the Reminiscences of a Stock Operator, a book which many NEP supporters have fondly quoted, “stocks are manipulated to the highest point possible and then sold to the public on the way down.” (pg. 246). I think this is because the hype created by the run-up creates solid demand to absorb large amounts of shares on the way down, as the dip-buying public steps up to the plate.

If this analysis is correct, it would imply that my thesis for poor returns over the next couple years is supported, because if a large portion of the stock is distributed among many smaller investors, an aggressive up-move will be harder to accomplish.

The Dec-31 institutional holdings report will shed more light on this hypothesis, but in the meantime, I’m curious to hear what others think! Good luck!

You be the Judge

I stand by my previous hypothesis that the long-term (1-3years) share-price prospects for NEP are substantially lower at this price. Is this not a parabolic chart?

NEP is one of the Biggest Bubbles, Ever!

You can see my previous posts about NEP here. As you can see, I’ve been wrong about where NEP’s rally will stop. These have been short term calls, so I believe I will be vindicated in the longer-term price action. I am going to prove to you that NEP is the biggest bubble ever, and that after the kind of move that we've seen in the stock price over the past 3.5 years will likely be followed by some years of stagnation, regardless of where this current spike peaks. The question will be whether you can sell in time to lock in your profits.

Let’s begin by examining NEP’s price action for the past 3.5 years (see the chart below which shows NEP’s weekly price candles).

The first aspect to which I’d like to draw your attention is a revised wave count. After reconsidering my previous wave count analysis, I believe we’re actually in the final thrust of a 5-wave sequence that began in 2006. This makes more sense, because the triangle from which we just broke out is normally a terminal pattern, meaning any rally is often fully retraced.

The second aspect deals with NEP’s raw price performance. In mid-2006 (7/17/06), NEP bottomed at $.17. Today, NEP closed at $9.16: a 5,288% return in just under 3.5 years, or 210% annualized growth for 3.5 years straight. No big deal, right? Many great companies out there have seen these kind of returns in their early years, right? This kind of growth should be possible, shouldn’t it? Let’s look at some facts: here is a list of great companies followed by their best lifetime stock performance, as well as their best 3.5y performance:

Company	Max Lifetime Gain	Time Period (y)	Best Annualized Gain	Best 3.5y performance
Amazon (AMZN)	9,187%	12.5	43%	1,503%
Hovanian (HOV)	1,042%	13	18%	1,437%
Research in Motion (RIMM)	9,283%	9	63%	1,397%
Apple (AAPL)	7,273%	25	18%	1,254%
Wal-Mart (WMT)	122,940%	27	30%	1,011%
Microsoft (MSFT)	59,538%	14	59%	693%
Barrick Gold (ABX)	10,946%	23	23%	686%
Proctor & Gamble (PG)	10,460%	38	13%	205%
China Northeast (NEP)	532%*	6	28%	5,288%

*(Note: NEP’s lifetime gain is so low because the stock started trading at $1.50, significantly above it’s lowest price of $.17, 3.5 years ago)

To be fair, I looked to see if AMZN did have similar growth over a smaller period. In fact, in the first 2.5 years after going public, AMZN did appreciate by 5,423%! But there are two key differences between AMZN and NEP: 1) this performance occurred at the height of the tech bubble; 2) AMZN was introducing a revolutionary service that warranted being rewarded with faster stock appreciation, while NEP is a simply drilling oil (what’s the big deal?).

Thus my conclusion from this data is that NEP’s 3.5y price performance has been ABSOLUTELY EXCEPTIONAL AND ABNORMALLY HIGH, given the un-uniqueness or lack of novelty in the business that would normally spur bubble-like performance.

My next thought related to price performance is that perhaps since it was a penny stock, such a massive move is not out of the ordinary, as you’ll often find 1000%+ moves in pump/dump stocks. Here are a couple such bubble charts that came to mind immediately (JRJC and MXC):

Notice the typical reaction is long-term downtrend, and these stocks only rallied 1,000%-1,500%. Now let’s compare these charts to a non-log NEP chart, and tell me if you don’t see a similarity:

NEP has been profitable since 2006/07. How is it possible that the market has mispriced this company so severely? An Oil-drilling company especially? What is so amazingly unique about this company that the market misjudged its profit potential at the beginning? How could it have been discounted this low? How is it possible that NEP was so underpriced to begin with that early shareholders have enjoyed 210% return per year for 3.5 years???? Has the market really been so inefficient, or is there something else going on?

Therefore, if you’re a long-term investor, ask yourself if buying at this point, after such a massive run over a relatively short period of time, makes sense. Sure, with the momentum of this move, it could double again, but this wouldn’t really change things much in the longer-term picture. When a stock goes parabolic, it will often retrace to the beginning of the parabola before starting a new run up. This indicates a retrace to $4-5.

In conclusion, make your NEP decisions knowing that history does not reward these kind of rapid moves over the next couple years. Ask yourself where the market went wrong such that it allowed the company to be so undervalued to begin with. Or, on the other hand, maybe you are part of the most obvious 10-bagger in the world (everyone has been touting NEP for a long time, well done!!). One thing I’ve noticed is that the market never rewards the obvious point of view in the long run.

Everyone, please find flaws in my logic, I'm all ears. Thanks for reading! I am wishing everyone best of luck in being able to sell their stock at high prices and booking the 'profits' that everyone has been bragging about! GOOD LUCK!

P.S. You can tell me all about P/E, valuation, etc. but I believe raw price performance will be the final factor in determining supply/demand, as history has shown in many other cases!