Apple Broke; Stock Market Will Follow

TheStreet.com

NEW YORK (TheStreet) -- In my article, If Apple Breaks $419, the Stock Market Will Break, I warned that a break of that critical support level would spell trouble for the entire stock market.

Apple is the most valuable and influential stock in global stock markets based on a combination of market capitalization and its trading volume.

Although Apple's stock price decoupled from the broader market several months ago due to idiosyncratic factors specific to Apple, I believe that any further downside for the stock will serve as an indicator of more widespread worries about sales growth and profit margins for the stock market as a whole.


The importance of Apple does not merely arise from the huge weighting (about 5%) that Apple's EPS represents in the overall EPS for the S&P 500 .

The situation with Cirrus' earnings warning today is just one example of how the fate of Apple is inextricably linked with the fate of many companies in the stock market, particularly those that comprise technology sector indices such as Nasdaq 100 and index ETFs such as PowerShares QQQ .

But troubles with Apple will merely serve as a psychological trigger that will likely prompt many investors and traders to examine the deteriorating fundamentals in other sectors besides technology.

For example, as a result of the ongoing crash in commodities prices, the EPS estimates of the entire basic materials sector of the S&P 500 are going to be have to be revised drastically lower. And the entire energy complex which has a huge weighting in the S&P 500 (about 11%) and ETFs such as Energy Select SPDR is likely to have its EPS estimates seriously downgraded as well due to declining oil and gas prices. Here the key level to watch is $84 on WTI crude oil. I would expect a break of that level to trigger a 15% correction in energy sector stock prices.

Consumer discretionary stock prices and ETFs that follow this sector such as Consumer Discretionary Select Sector SPDR are also far too buoyant given the deterioration of global growth indicators.

A variety of key leading sectors are either testing or breaking through their 50 day moving averages. The Dow Transports just broke through its 50-Day and the all of the energy indexes have crashed through their 50 day moving averages.


All of this suggests a garden-variety stock market pull-back developing that should ultimately take stocks down to the 1475 to 1500 level on the S&P 500. A major exogenous shock would probably be necessary to propel a pull-back beyond this level. We are still in a cyclical bull market and most intermediate term macro-fundamental and technical indicators remain quite strong.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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