iPad Hype: the Norway Connection

So here we are. Apple ( AAPL) is at all time highs. The stock is up another $5 today. The Apple/ PowerShares QQQ Trust 1 ( QQQQ) slingshot trade has generated huge returns.

We're waiting to sell until Apple moves against the market to the downside. But what is really going on here? This stock action certainly isn't happening because mainstream investors decided they wanted to buy in last Friday. This isn't investing 101.

This is advanced hedge-fund action; so let's make an effort to understand things from their point of view.

This run is happening because of Norway. About a month ago some third- party Apple reseller decided to put a link on its Website to allow customers to pre-order the iPad. It had to shut it down because the demand was overwhelming.
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Can Apple's rally be sustained?

We all know that Steve Jobs worries just as much about marketing as he does about the products themselves. At the end of the day, nobody actually needs an iPhone or an iPad in the same way that nobody needs an In-N-Out Burger or a Tito's Taco.

The atmosphere of standing in line to get your favorite product is very important. The lines outside of Apple and AT&T ( T) stores were essential to the iPhone's success.

Part of the iPhone secret was that the phone had to be activated at the point of purchase. This process took approximately five to 10 minutes and contributed to the lines. The iPad doesn't require the same activation process. So how can Steve Jobs generate similar hype? He knows he won't have the same lines that he had for the iPhone. This is where Norway comes in.

Apple doesn't need to do an iPad pre-order. But it's doing one on March 12. This allows it to make an announcement, telling the world that demand has overwhelmed its system and it won't be able to take any more.

This gets consumers anxious that they won't be able to get one and you know the rest. This is a controlled situation where the only outcome is a positive one.

Hedge funds do whatever they can do to eliminate risk in their short-term trades. This is an easy one. They see that Steve Jobs is going all out. He even appeared at the Oscar's wearing a tux! He knows how big this iPad can be and I guarantee he will use this pre-order as an opportunity to create a perception of scarcity.

If Apple goes in the opposite direction and decides to remain silent it would open up a window of opportunity for hedge funds to punish the stock on a perceived lack of demand for the iPad.

We'll be watching closely to see which scenario plays out. I've got a very quick trigger to take my gains off the table but I'm not quite ready yet. It looks like we're headed into the peak of Apple hype.
At the time of publication, Schwarz was long Apple, QQQQ.

Jason Schwarz is an option strategist for Lone Peak Asset Management in Westlake Village, Calif. He is also the founder of the popular investment newsletter available at www.economictiming.com. Over the past few years, Schwarz has gained acclaim for his market calls on the price of oil, Bank of America, Apple, E*Trade, and his precision investing in S&P 500 option LEAPS. His book, The Alpha Hunter, is set to be released by McGraw Hill in December 2009.