Apple fell 2.6% on Dec. 1 in an ugly close that left investors deeply suspicious

Apple had already dropped sharply twice on Tuesday — once at 10 a.m. and again at 3:25 p.m. — when, 12 minutes before the close, the volume of trading suddenly spiked and the stock went into freefall.

More than 3.5 million shares changed hands in a fury of last-minute trading, and when the dust cleared, Apple had fallen 5.27 points (2.6%) for the day to close at $196.97. Nearly 3 of those points were lost in the final 12 minutes, when $2.66 billion of the company's market capitalization evaporated in less time than it takes to drink a latte.

What happened? That's for the SEC to determine, assuming they care. But investors were deeply suspicious. In a day when the Dow climbed more than 126 points, there was no news bad enough to trigger a raid on Apple, no downgrades or negative analyst reports.

There was, however, some interesting back-channel chatter on the finance boards and among hedge fund managers. A partial timeline:

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The opportunity to cash in on the iPhone's subscription accounting has mostly passed

Source: Deagol's AAPL Model

Apple (AAPL) is scheduled to report its fiscal 2009 earnings next Monday, Oct. 19, and in the days ahead investors can expect to hear a lot about the new accounting rules that will allow Apple for the first time to book iPhone revenue when the sales occur, rather than spreading it out over eight quarters.

The effect of the old rules was to create a gap between Apple's actual revenue and its GAAP revenue (for generally accepted accounting principles) — the number the company is required by the SEC to report every quarter. This gap grew wider as iPhone sales accelerated, pouring billions into the company's coffers that weren't reflected in its earnings per share.

Many investors and analysts were well aware of this phenomenon. But many weren't, and the company's share price whipsawed dramatically as the stock fell in and out of favor over the past two years. The latest pop came three and half weeks ago when CNBC's Jim Cramer, anticipating that the new rules would boost Apple's EPS, told his Mad Money audience to go "all Jimmy Appleseed."

But Cramer's advice may have come too late, according to the chart posted above (and reproduced full size below the fold).

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With Apple (AAPL) closing at $184.55 a share Thursday — up 1.47% to hit a 15-month high — it's probably time for the legion of analysts who follow the stock to start rethinking their published price targets.

The current high target, $264, was set on air Tuesday by Mad Money's Jim Cramer. But he's more showman than analyst — even if he did trigger a 6.71 point (3.83%) rally the next day. (See here.)

Now more serious analysts are in the awkward position of having to follow Cramer without looking like Mad Money dittoheads.

The situation is especially uncomfortable for those with positive recommendations and targets — many set months ago — that are still well below the stock's current price. It's a surprisingly distinguished group that includes, according to AAPLinvestors,

• Thomas Weisel's Doug Reid ($150)
• Think Equity's Vijay Rakesh ($150)
• FTN Equity's Bill Fearnley ($155)
• J. P. Morgan's Mark Moskowitz ($167.50)

[An earlier version of this post included Merrill Lynch's Scott Craig  in this list. That was my error.]

The highest targets on record, not counting Cramer's, are those from RBC Capital's Mike Abramsky ($250) and Needham's Charles Wolf ($235).

The lowest, $90, set back in February by Calyon Securities's Shelby Seyrafi, is at least consistent with Seyrafi's "underperform" rating.

Below: the full list of 45 analyst ratings tracked by AAPLinvestors.

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Jim Cramer. Photo: CNBC

Apple (AAPL) shares rose 1.3% in after-hours trading Tuesday after Mad Money host — and confessed Apple stock manipulator — Jim Cramer raised his price target from $200 a share to $264.

Shares opened Wednesday at $178, up 1.6% from Tuesday's close, and by 12:25 p.m. were trading at $182.72 on high volume. The stock ended the day at $181.87, up $6.71 (3.83%), its strongest close since June 2008.

Cramer had argued on air that an accounting rule change that allows Apple to recognize the "true earnings" from its iPhone sales will cause the Street's 2011 earnings estimates for Apple to go from $8 a share to $12 a share.

The rule change is now in draft form, but Cramer believes will be approved by the Financial Accounting Standards Board (FASB) in a few weeks.

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A pair of videos appeared on the Web Tuesday that offer a two-part primer on how to trade Apple (AAPL) shares based on technical analysis — the science (or pseudoscience) of predicting what a stock is about to do based on what it did in the past.

If you're not familiar with such concepts as support, resistance, breakouts and Fibonacci retracements, you can learn a lot from each of them.

Unfortunately, the two videos offer conflicting advice. One says to sell Apple. The other shouts buy! buy! buy!

The more enlightening comes from The Market Club and is basically a promotional video for the company's trading tools. But in four minutes it swiftly demonstrates how to apply Elliot wave analysis and the Williams percent range to Apple's recent stock movements and suggests that the stock — which has enjoyed a 61 point (78%) run-up since Jan. 20 — may be ready for a pullback.

The more entertaining (or irritating, depending on your sensibilities) is tape of Tuesday's episode of Jim Cramer's Mad Money. Quoting extensively from his favorite technical analyst, Cramer argues that tech stocks in general are about to break out and recommends, in particular, buying Apple.

Cramer also offers several predictions about what Apple is going to do at the World Wide Developers Conference next week, some of which strike us as dubious. But advice from Jim Cramer, who famously described on tape to how he could manipulate the market for Apple when he ran a hedge fund, is always best taken with a grain of salt.

See the videos below the fold.

See also:

• Jon Stewart slams Jim Cramer with Apple video

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Tuesday's iPhone 3.0 special event drew the biggest headlines, but that wasn't the only Apple (AAPL) news that broke this week. The highlights:

HD movies on iTunes: On Thursday, the company announced that its collection of high definition movies, hitherto available only through the Apple TV set-top box, can now be purchased or rented on the iTunes Store for viewing on a Mac, PC or widescreen TV. Is this a sign that Apple is losing interest in its "hobby"? The pickings for now are slim — only nine of the "box office blockbusters" featured on iTunes' HD Movies page are currently available — and they're pricey. Apple will be charging $19.99 for Quantum of Solace in HD when it becomes available on March 24; as Business of Video notes, you can order the DVD from Amazon for $16.99.

Jim Cramer touts Apple: You would think that after his humiliation on The Daily Show with Jon Stewart — and the first TV broadcast of his advice about how to short Apple and foment FUD to drive it down — that Jim Cramer would just shut up about Apple. But you would be wrong. This time he's an Apple bull. "I'm not going to go against Apple," he declared on his Mad Money Lighting Round Thursday. "There are a thousand Steve Jobs over at Apple and they're delivering product after product."

Revenues plummet at Palm: As expected, Palm's (PALM) earnings took another drubbing in the quarterly results released Thursday. Revenue fell to $90.6 million from $312.1 million a year ago, in line with the warning the company issued two weeks ago, but far below the $155 million the Street had been expecting. The company is pinning its hopes on the Pre — Palm's answer to the iPhone — slighly delayed but still due out before the end of June. The earnings call transcript is available here.

The iPhones of summer: If we didn't already believe that Apple has some new handsets in the works, developers poking around the entrails of the iPhone 3.0 beta software have found fresh clues pointing to new iPhones, new iPod touches and two mystery products simply referred to as "iProd" and "iFPGA." See here.

The highlight of Thursday night's appearance of CNBC's Mad Money host Jim Cramer on The Daily Show with Jon Stewart — which both NBC and Comedy Central had done their best to promote as the grudge match of the century — turned out to be a two-year old TheStreet.com video of Cramer being interviewed about about how easy it is to manipulate Apple's (AAPL) stock price.

The video is famous among long-time Apple investors because what Cramer so candidly describes seems to confirm their worst fears about how the market really works. Cramer gave the interview to Aaron Task on Dec. 22, 2006, two and a half weeks before Macworld 2007 — the one at which Steve Jobs introduced the iPhone. The nut graph is this one, where Cramer explains how easy it is to "foment" uncertainty and doubt about a stock:

"You can't create yourself an impression that a stock is down, but you do it anyway because the SEC doesn't understand it … Apple's very important to spread the rumor that both Verizon and AT&T have decided they don't like the phone … You also want to spread the rumor that it's not going to be ready for Macworld. And this is very easy because the people who write about Apple want that story, and you can claim that it's credible because you spoke to someone at Apple, 'cause Apple doesn't … they're not going to comment … So it's really an ideal short. And again if I were short Apple, I'd pick up the phone and I'd do that today."

"When I watch that," Stewart told Cramer Thursday night, "I can't tell you how angry that makes me."

Stewart showed several clips from TheStreet.com interview to good effect, but the piece is worth watching in its entirety; it's a rare glimpse into the thought processes of a hedge fund manager.

The six-minute interview is usually available on YouTube, but not always easy to find, so we've posted it here:

If you missed the March 12th Daily Show, Comedy Central offers it in four (uncensored) parts here.

Should investors take comfort in the news that the Securities and Exchange Commission is investigating "Johntw," the as-yet unidentified rumor mongerer who briefly drove Apple (AAPL) down nearly 10% Friday before Apple PR finally broke its silence and let it be known that Steve Jobs had not, in fact, suffered a heart attack? (link)

Not necessarily.

As anybody who follows the company knows, rumors about Apple — negative and positive — are as common as crabgrass. This one, posted on CNN's iReport site, was particularly egregious, as it hit Apple where it is most vulnerable. CNN and Fortune are both owned by Time Warner (TWX).

CNN says it is cooperating with the investigation, giving the SEC what information it has about Johntw (most likely limited to an IP number and an e-mail address), and it is possible that the Feds will get their man. Or woman.

But then what? Although SEC Chairman Christopher Cox supposedly declared war against false rumors in July when Fannie Mae and Fannie Mac were getting clobbered by short-sellers, he admitted to the Senate Banking Committee at the time that before he stepped up the plate, the SEC had never before in its 75-year history brought market manipulation charges against a trader who was knowingly spreading lies.

It's true that in April Cox's SEC made an example of a trader named Paul Berliner, charging him with securities fraud for spreading a made-up story (via instant messages to traders in brockerage firms and hedge funds) that the Blackstone Group was renegotiating the price it had agreed to pay to acquire Alliance Data Systems — all while Berliner was selling ADS short, according to the SEC. (See here.)

"The message of this case is simple and direct" Cox thundered in the accompanying press release. "The Commission will vigorously investigate and prosecute those who manipulate markets with this witch's brew of damaging rumors and short sales."

But what did Berliner pay for his alleged crimes? He agreed to settle the charges by "disgorging" $26,129 in profits and interest, paying a penalty of $130,000 (the maximum), and consenting an order barring him from futher association with any broker or dealer. (link)

Will $130,000 dissuade anyone who is making millions at this game?

In his famous video interview with TheStreet.com — since removed from YouTube — CNBC personality and former hedge fund manager Jim Cramer told viewers how simple and profitable the game can be — especially with stocks like RIM (RIMM) and Apple.

Take Apple before iPhone came out, he says on tape, "it’s very important to spread the rumor that both Verizon and AT&T decided they didn’t like the phone… and this is very easy because the people who write about Apple want that story and you can claim that it’s credible because you spoke to someone at Apple because Apple doesn’t issue any statements."

It may be illegal, he adds, but it's easy to do "because the SEC doesn't understand it." (link)

The SEC now says it understands what's going on — although if they catch Johntw they still have to prove he (or she) was trying to profit from the false post. But it's not at all clear — especially with everything else that's going on in the market — that Cox has the resources to catch the thousands of Internet day traders who try to work this con every day of the week.

Or the teeth to make any punishments stick.

JPMorgan Chase (JPM) CEO Chase Jamie Dimon, for one, wants the SEC to toughen its sanctions.

"I think if someone knowingly starts a rumor or passes on a rumor, they should go to jail," he recently told Charlie Rose. "This is even worse than insider trading. This is deliberate and malicious destruction of value and people's lives." (link)