By Philip Elmer-DeWitt
January 23, 2010

Apple got whacked for no good reason in advance of Monday’s earnings report

I don’t pretend to understand much about how derivatives work or what hedge fund managers do, but I’ve been watching the ups and downs of Apple’s (AAPL) stock price long enough to recognize a pattern when I see it.

This one was a classic slingshot, described succinctly by Jason Schwarz in his seminal Apple: Seven Reasons Shorts Love It:

“If you can keep a good stock down,” he wrote, “then you are able to load up for the ride back up. It’s like a slingshot — the harder you pull, the more propulsion you generate.”

This slingshot was timed to bring Apple’s shares down in advance of the company’s first quarter earnings report on Monday. The action started at 9:12 a.m. Friday when reported, without explanation, that Deutsche Bank had removed Apple from its short-term buy list — a report that was immediately picked up by financial journalists, including the talking heads at CNBC, who mischaracterized it as a “downgrade.”

What actually happened, as the folks at Deutsche surely knew but didn’t bother to announce, was that Apple’s six months on their short-term list had expired that morning, triggering a computer instruction that removed it from the buy list automatically.

No matter. The boys were looking for a reason to take a whack at Apple, and this news fit the bill. They started dumping shares, and by the close of trading the stock had fallen 10.32 points (4.96%), shaving $9.3 billion off the company’s market cap.

The stock price having hit bottom, somebody started loading up on AAPL. More than 1.65 million shares traded hands at 3:59 p.m.

Adding insult to injury, a settlement trade at 8:01 p.m.¬†appeared to bring the stock back up to $204.78 — a 3.55% pop in the dark of night. (See chart above, courtesy of AAPL Sanity’s sepod.) [UPDATE: I am told this last one was a “late cross” of 500 shares from earlier in the day — a fairly common occurrence on busy trading days — and will be gone by Monday morning.]

The point is, nobody really thinks that Apple is going to deliver a bad report on Monday. Quite the contrary. The consensus among the analysts we polled is that Cupertino had an amazing Christmas quarter, with earning up 30% or more year over year. (See Apple’s earning: What the analysts say.)

And I’m inclined to agree with iPhonAsia’s Dan Butterfield, who suggested in a bitter post written Friday evening¬† “that the majority of trading desks understood precisely what happened at Deutsche Bank, but held tight to the truth and may have intentionally misled the financial press (by omission).” (See Don’t get punked II.)

To his credit, CNBC’s Jim Goldman issued a correction an hour and a half before the market closed, explaining that his and everybody else’s “downgrade” report was a mistake. But by then there was too much momentum against Apple — and indeed the entire market — for the tide to turn.

It’s days like this that make President Obama’s so-called Volker Rule — his proposal to ban bank holding companies from owning, investing in or sponsoring hedge funds or private equity funds — sound not so crazy after all.

I have no idea what the market’s going to do Monday morning, but people much smarter than I have some pretty good ideas about what Apple is going to report that afternoon. See here.

Tune in at 4:30 p.m. ET Monday for our coverage of Apple’s Q1 2010 earnings report and its 5:00 p.m. conference call. And come back Wednesday at 1:00 p.m. ET for our live blog of Apple’s “latest creation” event in San Francisco.

See also:

[Follow Philip Elmer-DeWitt on Twitter @philiped]

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