What's Really Behind the Apple Inc. (AAPL) 'Flash Crash'

There are multiple theories swirling as to why AAPL took a dive on Monday

by Adam Warner

Published on Dec 3, 2014 at 10:06 AM
Updated on Apr 20, 2015 at 5:10 PM

It was quite the morning for Apple Inc. (NASDAQ:AAPL) on Monday. The stock has performed very well just short of forever. But for one brief, shining moment, the bears had their day -- or their minute. (Click on the chart below to enlarge.)

One-Minute Chart of AAPL on Dec. 2, 2014

It sure looks like a fat finger error of some sort. But, that apparently was not the case. This, from Bloomberg.

Apple's retreat was mirrored in technology stocks from Tesla Motors Inc. toTripAdvisor Inc. and FacebookInc. and came just before the Standard & Poor's 500 Index pared a decline of 0.8 percent after a report showed U.S. manufacturing expanded faster than economists projected in November. Apple shares have rallied 44 percent in 2014, the 16th biggest gain in the Nasdaq 100 Index of technology stocks.

None of the major stock exchange operators reported clearly erroneous trades following the move in Apple. Neither Nasdaq OMX Group Inc., NYSE Group or Bats Global Markets received any such filing, which is made when a broker mistakenly executes trades and wants to cancel them.

Declines in Apple may have accelerated when the shares reached prices at which investors had placed automatic instructions to sell, known as stop-loss orders, according to Michael Block, chief equity strategist at Rhino Trading Partners LLC.

It sounds more like "bunny with good nose" than "fat finger," but that doesn't fully explain it either. Facebook Inc (NASDAQ:FB) did decline around the same time, but in a quite different pattern. Apple fell out of bed while volume and implied volatility exploded in a one-minute stretch (9:50 a.m. ET if you're keeping score). Facebook, on the other hand, dropped about a minute or two later by only 0.4% -- and didn't see nearly the volume explosion.

The most plausible conclusion is that Apple happened and other tech names briefly reacted before everything righted. Perhaps AAPL triggered stops and then snowballed, but would that cause such an abrupt move? That's hard to believe. Remember, we're talking AAPL here, not some one-product biotech with rumors flying.

So I'll cast my vote with the Fat Finger, despite the exchange denials. Perhaps, whoever executed the trade was able to flip it back around for a profit and never had to file anything. Or maybe someone "accidentally" flooded the market, knowing he could trigger some stops and buy it right back. Or, maybe I am too much of a conspiracy theorist?

In any event, no harm, no foul -- right? The stock is down 4 points from opening levels on Monday, but it is still hard to make the case that longs are in much pain here.

Well, the implied volatility remains elevated. The Apple "VIX" shot up from 26 to 32 in the local flash crash, but it has held onto half the gains. So maybe there is fire around this smoke somewhere?

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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