Back in early October, shorting Apple (AAPL) and going long Nokia (NOK) seemed like lunatic moves to most investors — which is why it has worked like a dream for some. Nokia’s share price is up by 40% since that point in time while Apple has tumbled by more than 20%. One of the things driving Nokia higher is the number of people who shorted the stock during the summer and are now forced to buy back shares as they panic about the rebound. Meanwhile, Apple’s share price is plunging as hedge funds have started sweating over the risk of holding a declining name as 2012 draws to a close and annual performance is on the line.

Of course, Nokia’s smartphone market share is still tanking and Apple still has smartphone operating profit level that defies gravity and history. But that is the thing: some analysts are now predicting that Nokia will sell fewer than 3 million Windows Phones during the fourth quarter this year. The bar is so low that clearing it might be doable.

For Apple, the situation is opposite. Its iPhone profit margin is so high that it’s not hard to see why overall margins will come under pressure in 2013. China Mobile is haggling for far better terms than earlier carriers Apple signed up; the iPad has lower margins than iPhone; the iPad mini has lower margins still; and Apple is losing the smartphone share battle badly to Samsung (005930) in Latin America, Africa and Asia as long as it refuses to let its handset ASP drift below $600.

However, Nokia’s ongoing surge relative to Apple is changing the mental game ahead of December quarter reports. Expectations for Nokia are growing every week — the company has beaten its handset volume estimates for two quarters running and now investors are beginning to expect another Asha-driven feature phone volume surprise. Expectations for Apple keep going down as investors price in things like the iPhone 4S possibly outselling the iPhone 5 and the iPad getting cannibalized by iPad mini.

There is still a month before Nokia and Apple report but when they do, we might see exceptional volatility as the biggest winner and the biggest loser in the phone industry deal with wild swings in market sentiment.

One sign indicates that a turning point might be near: Apple has been hit by no more than three price target reductions over the past couple of hours as brokerage houses have started panicking over the share price decline, turning negative on the name. This sometimes marks the sentiment bottom, at least in the short-term.