Apple Could Kick Stock Market in the Core

TheStreet.com

NEW YORK (TheStreet) -- At the open Thursday, Apple was at $399.91. There are several reasons why Apple may be a bigger problem than you think.

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. It took only two trading sessions for this scenario to begin to play out.

Although it is true that Apple's stock price decoupled from the broader market several months ago, due to stock-specific idiosyncratic factors, I believe that the dramatic break of the key $419 support level on April 17 will tend to trigger more widespread worries about sales growth and profit margins for the stock market as a whole.

The Apple Economy

Apple is now the second most valuable stock in the world, after Exxon , in terms of market capitalization. However, it remains by far the most influential stock in global stock markets, from a technical standpoint, when other factors are taken into account, such as index weightings and dollar-weighted trading volume.

In terms of fundamental impact, the importance of Apple goes well beyond its top ranking in terms of EPS weighting (about 5%) in the S&P 500. As Apple's earnings go, so too will the earnings of dozens of Apple suppliers.

Cirrus' earnings warning on April 17, and the resulting 15% stock price collapse, which was based on a decline in Apple orders for one of its product lines, 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 the Nasdaq 100 and index ETFs such as PowerShares QQQ .

In particular, the probable secular decline in Apple's profit margins in the next few quarters and years, due to increasing competition, a commoditization of its products will most likely be mirrored by shrinking profit margins by Apple suppliers.

Broader Impact of Apple's Plunge

The most troubling thing for the market as a whole is that the worries about declining earnings in the "Apple economy" may serve as a psychological trigger that prompts many investors and traders to examine the deteriorating fundamentals in other sectors. 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 have to be revised drastically lower.

Furthermore, the energy sector that has a huge weighting in the S&P 500 (about 11%), and ETFs such as Energy Select SPDR , are likely to have their EPS estimates seriously downgraded, due to declining oil and gas prices. Watch the $84 level on WTI crude oil. I would expect a break of that level to trigger a 15% correction in energy sector stock prices.


Dramatically declining PC sales have caused major stock-price declines for companies that are linked to the sector, such as Intel and Microsoft .

Everywhere you look, EPS estimates seem to be under assault. Heading into first-quarter 2013 earnings season, negative pre-announcements were at their highest levels since those statistics have been kept. The S&P 500 has already experienced two straight quarters of year-over-year EPS contraction. A third-consecutive year-over-year decline would likely cause concern in some quarters that earnings have peaked and that this will signal a top in stock prices for this particular cycle.

Conclusion

Apple is not the only stock experiencing technically important declines. A variety of leading sectors are either testing or breaking through their 50-day moving averages. For example, the Dow Jones Transportation Average just broke through its 50-Day MA and all of the major energy and other economically sensitive and cyclical indices, such as Morgan Stanley Cyclical Index, 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 break of the 1538-1540 level in the next few days would tend to confirm the likelihood of this scenario.

Should investors worry? It depends on their time-frame. In the short term, there is reason for concern. Looking a bit further out, we are still in a cyclical bull market and most intermediate-term macro-fundamental and technical indicators remain quite strong.

Either way, this is not a time to be complacent. There are a slew of potential trouble spots around the world from Europe, to the Korean Peninsula to the Middle East, and a major exogenous shock could transform the minor pullback I am currently forecasting into a more serious correction.

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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