Recently on CNBC, Jim Cramer described Apple Inc. (NASDAQ:AAPL) as a “can’t get anything right” company, describing its future products as sure losers, all while Goldman Sachs downgraded the company and CEO Tim Cook issued an apology to Chinese consumers. You might have read headlines like “Cramer calls Apple the J.C. Penney Company, Inc. (NYSE:JCP) of Tech,” “Goldman Downgrades Apple,” “Apple Bow to Chinese Pressure with Apology.”
You might have felt upset or defensive — a natural position for investors when they believe their stock is under attack. But in this case, Cramer was mocking the sudden shifts in Wall Street psychology that often define a trending stock. Watch Cramer’s video here — it’s well worth it.
With that in mind, I wish to discuss the psychology of the stock market and one underlying principle that most escapes most investors: The graph of a stock’s price, absent of specific concrete news, is a graph of investors’ psychology.
This is the reason why most stocks are up on days when the major indexes rise, and vice versa when those indexes fall. It’s why I cannot completely dismiss technical analysis as voodoo, and the reason stocks normally trade in trends.
Humans Are Irrational Creatures
As much as economists like to theorize that markets are perfectly efficient, reality suggests a different story. How else would we get the numerous bubbles we’ve had through the centuries, from the Tulip Bubble in the Netherlands, to the dot-com bubble, to the recent real estate bubble when the banks could “do no wrong.”
During this time you saw soaring asset prices, and just about any company involved with the industry soared along with them,. If you made a short-term bet against the herd, you got stampeded. I can tell you, as a writer, when Apple Inc. (NASDAQ:AAPL)’s stock was soaring to levels I believed were overpriced (not crazily overpriced mind you) just overpriced, the backlash from “the believers” for writing something negative about it was large enough that for personal comfort, one thought twice about it.
Back to Cramer
In the video, Cramer mocks the sudden turn in psychology against Apple, sarcastically stating: “Whatever product that is coming out in September is a clear loser. We haven’t seen it yet, but it is a loser.”
“Let’s just call it as it is,” he continues:
… There has not been a single piece of good news about Apple for 300 points, and today is just another day when the news is just horrendous. … These are all downgrades on growth and missed quarters. When you see someone so certain that not only that this quarter is bad but the next quarter is bad, I think tomorrow we get a downgrade and they’ll say that 2014 going to be bad.
Cramer is sarcastically making his point, and I completely agree with him. When Apple Inc. (NASDAQ:AAPL)was trading up north of $600, it could do no wrong. But now that psychology of the market has shifted against Apple, it can do no right.
Today, the negative articles against Apple far outpace the positive. You might be an Apple investor and seen the headline, “Cramer Calls Apple Inc. (NASDAQ:AAPL) the J.C. Penney of Tech,” and have a knot form in your stomach.