Could Big Dumb Money Equal Profitable Post-Panic Rebounds?

Charlie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A few days into my experiment with Apple (NASDAQ: AAPL) and I am watching with rapt fascination.  Fits my theory well.   Could this classic panic behavior be explained by part of the nervous Apple flock flushing followed by instant transactions from Big Dumb Money (BDM) as postulated by David Gardner?  I just happened to come across the December 2012 Stock Advisor paper newsletter today.  Pure serendipity, but there I was re-reading the following David G quote: "BDM makes it easier for us to beat the market, and I think its prevalence explains some of our outperformance at Stock Advisor.  But by the same token, we must sit patiently through sometimes ridiculous or inexplicable volatility to benefit."  I think I just saw some of that with AAPL.   Maybe I will see more in the next few days and pick up a little more, say a slice (ha) of AAPL instead of just a pinch.

It is so temptingly encouraging to my basic idea that I am watching other things I would like to own like 3D Systems (NYSE: DDD) for signs of similar behavior.  If a widely held darling like AAPL is subject to such forces, I have to believe DDD is even more sensitive to it as a much more narrowly owned and much lower volume trading equity-  APPL 90 day average 21 Million sh/day  DDD only 2 Million sh/day.  The possible knock out for this theory: BDM has to have an interest in DDD to transact shares and overdrive the stampede, and there is no evidence of that as yet.  But it seems the evidence is pretty clear with AAPL, with three days far above its 90 day average, two days over 40 million shares.  Is BDM interested in DDD? Well, AAPL has 939 million shares outstanding, and DDD only has 57 million- perhaps not big enough to interest BDM traders.  However, both AAPL and DDD appear to have similar institutional ownership near 64%, so I will watch and wait.

This has all the appeal of a cause and effect "treasure hunt" for me.  Where else can I find some basically good enterprises that have "watch and wait" signals - out of line P/E, widely held, just a panic away from a buying opportunity?  Perhaps Dolby Laboratories (NYSE: DLB) is a candidate.  At 101 million shares outstanding it looks plausible, but then a 90 day average volume of just 767,000 doesn't seem to fit.  However, it seems to have really high institutional ownership, near 98%, so that might explain the low volumes.  A look at Tempur-Pedic (NYSE: TPX) suggests such things have already happened with some wild swings in price on 59.5 million shares outstanding and a 90 day average volume of 1.9 million shares/day.   TPX has had excursions of over 10 million sh/day and has 90% institutional ownership, so perhaps DLB is a fit for this kind of panic after all.  A candidate to watch. 

Perhaps some other high volume darling, like Boeing (NYSE: BA)  may be a better fit.  BA has some interesting volatility in the past year, over 754 million shares outstanding and a 90-day average volume of 5.5 million sh/day- this makes the situation a little closer to AAPL.  Looking more closely, 72% institutional ownership and at least one excursion over 20 million sh/day and three more over 15 million/day in recent months give me more evidence for a panic candidate.  Perhaps the ongoing battery fire saga or some new 787 issue will create nervous owners.  This bears watching.

Of course, keeping a cool head while all others about you are losing theirs is easier said than done.  Sometimes there is a good reason for the panic.... deducing the truth of that is essential, otherwise you ride a rocket ship screaming into the ground.

SkepikI has long positions in Apple, Dolby Laboratories, Tempur-Pedic and Boeing. The Motley Fool recommends 3D Systems, Apple, and Dolby Laboratories. The Motley Fool owns shares of 3D Systems, Apple, and Tempur-Pedic International and has the following options: Short Jan 2014 $55 Calls on 3D Systems and Short Jan 2014 $30 Puts on 3D Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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