Thursday, July 23, 2015

AAPL and The Market

Our Tuesday post highlighted the noticeably thin leadership in the market and the need for greater participation if the indexes were to head higher in the 2nd half of the year.  Through the 1st six and a half months of 2015, the market's stalwart has been the health care sector.  It has accounted for half of the S&P 500's overall gain so far and helped to offset the weakness in utilities, energy and elsewhere. In the post, we offered up some recent commentary for Nicholas Colas, chief market strategist for Convergex, where he noted that in addition to health care the sectors looking most primed for further upside were financials and technology.

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:

"In the price-weighted Dow, Apple, at $124 or so, doesn’t have the biggest weighting; that goes to Goldman Sachs Group Inc. and its $212 stock. However, Apple loss on the day, more than $6 right now, is the largest loss, so it’s having the biggest drag on the index. With the stock down $6.60, it works out to about 44 of the Dow’s current 67-point loss.
It’s easier in the S&P and Nasdaq, both market-cap weighted indexes. There Apple is the biggest component, and with the S&P having such little momentum in early trading, Apple’s is single-handedly pulling the index into the red.
“At $124.49, Apple is taking the index down 0.19% or 4.08 points,” said Howard Silverblatt, the senior index analyst at S&P Dow Jones Indices. “It is taking the S&P 500 Information technology sector down 0.95%.”" 


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. 

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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