Mr. Colas pointed out that technology stocks, which make up 20% of the S&P, had shown incredible strength in recent weeks including last week where the sector was up 4% after strong earnings reports from Google and Netflix. Tech certainly has momentum and relative strength on its side right now. However, those positive feelings were cast into some doubt on Tuesday afternoon when the market decided that Apple's near $11 billion in profits in Q2 were not enough. The stock was off more than 7% in the after-market and threatening to breach its 200-day moving average in the $119-120 area.
Apple opened trading yesterday down more than 6% at $122/share but managed to rally intraday to close above $125 and down just over 4% for the day. If there's one stock that could topple the market's upward trend, it's probably Apple. In terms of size, it makes up nearly 5% of the Dow, 4% of the S&P 500, 15% of the Nasdaq 100 and 18% of the XLK (SPDR Technology Select Sector ETF). As the Wall Street Journal noted during trading yesterday, the market was being held down by Apple's fall:
Further, the Nasdaq 100 fell more than 1% yesterday and the XLK was down 1.5% primarily because of Apple's weakness. While the stock's intraday action yesterday was encouraging, we'll want to watch how it behaves in the coming weeks. Its chart is now showing a triple top ($133-134 area) formation that began back in March.
How it resolves itself in this $120-134 zone will not only be important to Apple shareholders but to the overall market as well. It will tougher for the broad indexes to make meaningful gains if this key component isn't along for the ride. But with a very reasonable valuation we think the downside will be limited. It may not take off to the upside like other stocks have upon their earnings announcements but if it holds here we think there's plenty of strength in other areas to propel the market higher.