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 EconomyApple is now the second most valuable stock in the world, after Exxon
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.
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 PlungeThe 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
Dramatically declining PC sales have caused major stock-price declines for companies that are linked to the sector, such as Intel
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.
ConclusionApple 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.
- 10 Most Expensive Trips To The Ballgame in 2013
- 10 Best Convertibles for Summer 2013
- 10 Highest Beer Prices In Major League Baseball
- Basic Materials Industry
- stock market