'Upset the apple cart' is an English expression referring to something that causes trouble or upsets someone's plans.
What happens if someone upsets Apple stock?
To assess this scenario, we have to understand just how integral Apple is to recent gains across the board:
How Huge is Apple?
Based on market capitalization, Apple is the most valuable company in the world. With its recent surge in shares, Apple became the first company to be valued north of half a trillion dollars since ExxonMobil in July 2007.
As a comparison, ExxonMobil is valued around $390 billion. Microsoft's market cap is around $250 billion, Google's around $200 billion, IBM around $220 billion and Wal-Mart around $210 billion. Since January 2007, AAPL has surged nearly 500%. Many analysts feel that Apple with be the first company to break the $1 trillion mark (I'm not one of them).
In the fourth quarter of 2011, Apple reported a profit of $13 billion. The amount that S&P 500 earnings beat the average analyst estimates drops by about two thirds when Apple profits are excluded
Apple = Gains
That's all impressive, but it doesn't illustrate Apple's true gravitational pull on the broad stock market. The following performance numbers drive home the point.
AAPL: Year-to-date up as much as 29.95%
Nasdaq-100 (Nasdaq: ^IXIC - News): Year-to-date up as much as 14.19%
(Nasdaq-100 exposure to AAPL = 16.74%. AAPL biggest component of the index)
S&P 500 (SNP: ^GSPC - News): Year-to-date up as much as 7.81%
(S&P 500 exposure to AAPL = 3.87%. AAPL biggest component of the index)
Dow Jones Industrial Average (DJI: ^DJI - News): Year-do-date up as much as 5.79%
(DJIA exposure to AAPL = 0%)
When it comes to index investing, APPL is obviously an important ingredient to success.
Has the AAPL-cart Been Upset?
The chart below shows AAPL's furious ascent. AAPL has been pushing the upper Bollinger Band (red line) for weeks, but today's decline put an end to this. Wednesday's big red candle engulfed the prior two green candles, a bearish constellation.
AAPL's Wednesday decline also triggered a percentR low-risk entry. In a strongly trending market, percentR low-risk entries provide an excellent buying opportunity (such as on January 20 and 24 - see yellow arrows). A failed low-risk entry however, has generally resulted in periods of lower prices (yesterday's ETF Profit Strategy Newsletter update explained how to trade using the low-risk entry).
AAPL on Cusp, What's Next for Stocks?
AAPL appears to have reached a fork in the road, what does that mean for stocks?
Frankly, I'm getting mixed messages. It's bearish that various sentiment gauges have reached multi-month and multi-year extremes that tend to foreshadow lower prices.
The S&P has also reached the progressive up side targets outlined by the ETF Profit Strategy Newsletter and closed the open chart gap mentioned in January.
October 2, 2011 ETF Profit Strategy update: 'Even though October has hosted some ugly bear markets, it has also killed its fair share of bear markets. I don't think October will kill this bear market, but it should spur a powerful counter trend rally. From a technical point of view this counter trend rally should end somewhere around 1,275 - 1,300 (in Q1 or Q2 2012).'
January 29, 2012 ETF Profit Strategy update: 'Prices below the first trend line (1,328) keep the pressure on the down side while prices above the first trend line allow for the open chart gap at 1,353 to be closed.'
On the other hand, I'm not seeing the kind of RSI divergence (on a weekly chart) that tends to precede larger scale tops, and after some weak spots in February, seasonality will gain some strength before the seasonal sell signal. Oh, sorry, did I forget to mention the Fed's covert QE3 operation?
How to Trade
In summary, I expect the coming days and weeks to be challenging and potentially frustrating.
The easiest and most effective way to navigate this kind of market is via tried and true support/resistance levels.
Why not allow the market to outline its intended trading ranges via support/resistance levels? A break below support will open up a new trading range to the down side while a break above resistance opens up a trading range to the up side (similar to the 1,328 level mentioned in January).
The bonus of this approach is two-fold: 1) Investors can profit to the up or down side (my short-term bias is to the down side) and 2) Investors will not lose out on the next big move (whether it's up or down).
The ETF Profit Strategy Newsletter outlines important support/resistance levels needed to follow this strategy and provides a no-nonsense short, mid and long-term outlook for stocks.
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