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1 More Culprit Behind Apple's Sell-Off

Over the past several months, much Foolish ink has been spilled over why Apple (NASDAQ: AAPL  ) has had such a monstrous pullback from its all-time highs set on the same day that the iPhone 5 launched. Inevitably the sell-off is tied to everything from perceived iPhone 5 shortages (which are now effectively gone), possible capital gains tax increases, increased competition, and many more.

Here's another culprit to add to the list: the shorts are piling on.

Since the end of August, Apple's short interest has increased dramatically from roughly 13.6 million shares held short to over 21.6 million shares held short at one point in November. That's an increase in bearish sentiment of 59% over 2.5 months. Unsurprisingly, Apple shares have become increasingly weaker in the face of overwhelming pessimism.

Source: Nasdaq.

There are a couple things to point out on this chart. Short interest figures are reported by the exchanges at the middle and end of each month based on settlement date. I've included closing prices on those dates, but closing prices are based on trade date. That means there's a three-business-day discrepancy, but you can still see the net result after several months.

In particular, the biggest jump in short interest of 28% during the first half of November corresponds to a 12% drop in Apple shares over the same time.

At the same time, there are limitations with looking solely at short interest to explain market activity, although the figures can add some context. Apple has 940.7 million shares outstanding, so even the recent short interest peak was only 2.3% of shares outstanding. Also, Apple's average daily volume is above short interest, so the number of days it would theoretically take to cover those shorts is typically just one.

Investors should keep something else in mind, though: those shorts are about to get squeezed out when Apple reports its monster fiscal first quarter in January.

There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

Read/Post Comments (4) | Recommend This Article (6)

Comments from our Foolish Readers

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  • Report this Comment On December 27, 2012, at 9:05 PM, EquityBull wrote:

    Those short interest figures are both neglibible. this is like saying I sold 10 iphones and sales are up 10 fold this year (to 100...big deal).

    Apple has almost 1 billion shares outstanding so until at least 10% to 20% of those (100M to 200M) are short this is a non event.

    20 million shares short is about 2% of the whole float making apple still not heavily shorted. At 14 million shares short it was 1.4% short. So from 1.4% to 2%. Both inconsequential.

    Apple's sell off is due to tax selling and the markets realization that apple is not shareholder friendly and intends to let the cash pile up and not be distributed. Market assumes apple will build cash up and then burn it all down when things go south someday whether in 5 years, 10 or 15. In other words shareholders will never see a dime of it.

    Don't consider 10.60/share material either. In 5 years that is 53 in dividends. Apple loses that in share price every 2-3 days now. If the stock stays where it is for 5 year that is a 5 year return of 10% BEFORE tax. Not good

    Until Apple changes its tune and starts a real dividend and real buyback nothing is going to change in a material way

  • Report this Comment On December 27, 2012, at 11:07 PM, FreeRange1 wrote:

    @equitybull - what nonsense! I trust Apple more with their huge cash pile than I do putting it into your greedy hands. Further, Apple has treated shareholders superbly by contnuing to focus on excellence and delighting their customers with an end result that shareholders have been richly rewarded.

  • Report this Comment On December 28, 2012, at 12:01 AM, lojikfool wrote:

    Hi Evan, good point, I have always been thinking that the low % short made it irrelevant, but 19m shares is still $10b which is not so irrelevant.

    I'm still trying to figure out the average mix of Apples average, the balance between short term and long term money and how much of it will evaporate with a spike (say from next Q's results!), leading to a serious short squeeze even with such a low cover ratio...I'll let you know if I figure it out!

    On another note, you link to a possible blowout with next Q's results, which I agree with, but there have been some rumblings about Apple's manufacturing and component cutbacks for some products (iPhone/Pad and supply constraints for others (Mini) recently and I'd love to get your insight on that if you have any thoughts.

  • Report this Comment On December 28, 2012, at 2:09 PM, JaanS wrote:

    Of course, at some point in time the short interests will need to cover. Also, anyone selling to take capital gains before 1 Jan will be too late to do so come 1 Jan.

    How to ride the resurge?

    How to ride the rebound come Jan 1:

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