It's easy but generally useless to provide market commentary after the fact. The article below was originally published on April 4 and cautions of a decline ahead for Apple and the market in general.
Stocks are down noticeably since, but how much lower will they go?
I'd like to start this article out with a quote from Dale Carnegie's book: "Here lies the body of William Jay, who died maintaining his right of way. He was right, dead right, as he sped along, but he's just as dead as if he were wrong."
Chances are everyone knows a William Jay of some sort. If you don't, you have to look no further. I did not expect the S&P to rally to 1,400 and above. I'm an investment William Jay, who from his (bearish) standpoint did not sway.
There are plenty of reasons why stocks should have declined, but they didn't. And even though you may be right about the fundamentals, nobody wants to have "I was right but lost" written on their financial tombstone. That's why it's good to balance ones personal opinion.
This article will take a look at the MO of this rally (and what we can learn) and the tools that helped me to balance my bearish viewpoint and even predict this rally back in October.
Technicals over Personal Bias
Judging by various surveys, I wasn't the only one to be surprised by the market's massive rally. Fortunately, I rely on technicals more than on my own smarts.
A contrarian interpretation of technicals (along with sentiment and seasonality) strongly suggested a major rally back in September 2011. The September 23 ETF Profit Strategy Newsletter viewed a new low followed by a monster rally as a foregone conclusion when it stated September 23:
"From its May high at 1,370 to its eventual low, the S&P will likely have lost about 300 points (22%). This kind of move validates a counter trend rally. The plan is to square short positions and buy long positions around 1,088. The rally, once underway, will probably re-inspire a certain degree of confidence into the market before it runs out of steam."
Via the October 2 ETF Profit Strategy update I shared this trading advice: "Based on the data we have, it's prudent to scale down short positions around 1,100 and exit most short positions around 1,090. Regarding getting into long positions: 1) Buy against 1,088 with a fairly tight stop-loss below or 2) Buy after the S&P registers a new low (around or below 1,088) and comes back up above resistance at 1,088 and/or 1,121."
Based on various studies and historical patterns, I expected this rally to stall around S&P 1,300. That appeared to be the case in late October 2011 when the S&P started to slide 100 points from its 1,292 high.
However, things didn't line up for a sell signal and the October 27 ETF Profit Strategy update cautioned that: "A market top at this time is not supported by seasonality."
Various indicators suggested lower prices but the covert version of QE3 (the Fed's currency swap arrangements and Europe's LTRO I and II) led to a supercharged bullish seasonality effect.
Extra liquidity kept pushing the S&P above key resistance levels, such as 1,369. The February 17 ETF Profit Strategy Newsletter stated that: "A break above 1,369 (as long as the S&P can stay above) would unlock more bullish potential with 1,425 as a potential target."
Red Flag Warnings
And that pretty much brings us to today. The S&P stalled and reversed 3 points shy of hitting 1,425 and technicals, sentiment and seasonality are getting close to triggering a composite sell signal, just like they did in April 2010 and 2011.
Euro 1 trillion worth of LTRO liquidity may do wonders, but we're getting to a point where the odds favor lower prices, especially once the target price is reached or crucial support is broken.
One Bad Apple Spoils The Bunch
Apple's shares are off the charts and analysts keep upping their price targets, many now above $1,000 a share. The applemania is becoming palatable and more often than not this kind of behavior comes back to bite the stock (and investors) in the butt.
The chart below shows an obvious divergence between price and momentum (RSI – Relative Strength Index). Observe how prices keep climbing while RSI is falling. This doesn't mean shares have to decline right now, but it's an early warning.
The generally bearish phenomenon is not only limited to Apple. It can be seen in the chart of all major indexes and leading sectors like technology and financials. A look at the number of stocks above their 50-day SMA (also declining as index values are rising) shows that buying is becoming more selective (can you say Apple?).
A sore throat tends to lead to a cold and such divergences - especially in combination with an overbought stock market – tend to end with disappointment.
Can't Escape Apple
"But I don't own Apple," you might say. Even if you are one of the unlucky handful of people that don't own AAPL, consider this:
Apple now accounts for 19% of the Nasdaq-100 (Nasdaq:^IXIC - News) and 4.50% of the S&P 500 (SNP:^GSPC - News). If you own QQQ (NasdaqGM:QQQ - News) or SPY (NYSEArca:SPY - News) or any tech or S&P fund, you own AAPL by default. And guess what, if Apple coughs, the market – including the Dow Industrials (DJI:^DJI - News) and Russell 2k will get a cold.
That doesn't mean you have to trigger the "sell everything" button right now, but it behooves investors to be aware that stocks in general and Apple in particular are treading on thin ice and are susceptible to a "break through" event.
When prices – whether Apple, Nasdaq or the S&P – fall below support, they are likely to drop further and investors will get wet like an unsuspecting dude breaking through thinner than expected ice.
The ETF Profit Strategy Newsletter outlines crucial support levels for the Nasdaq, Dow Jones Industrials, S&P and AAPL and provides an easy to understand short, mid and long-term forecast for various asset classes.
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