For some time now, stock prices have been overstretched. We’ve witnessed rising prices on thin volume along with a lack of broader participation by more than just a handful of stocks. None of it was the sign of a healthy market.
One of the stock market’s most beloved leaders is now a laggard: Apple (NASDAQ:AAPL). The mood has now turned from optimism and euphoria to anxiety and fear.
When Apple broke below $564 on November 7 everything changed. It marked an official 20% bear market decline in the stock from its $705 high. It also added to the technical damage in Apple’s once beautiful charts. Will the fear of Apple’s fall turn to panic and eventually capitulation? How fast things change.
Just a few months ago, here were the rosy headlines:
“Wall Street Analysts Increasingly Bullish as Apple Hits Fresh Highs.” – Wall Street Journal on 8/27/12
“Apple seen as ‘trillion dollar baby’” – MarketWatch on 8/21/12
“Apple could be worth a trillion in one year” – The Atlantic Wire on 9/23/12
“Apple: $1,111 per share and a $1 trillion market cap next year.” – All Things D on 4/26/12
Boy, were they wrong. News headlines from our friends in the media turned out to be a great contrarian indicator.
Leadership (or lack of it) is an important factor for the broader stock market (NYSE:VTI). From 2000-02, the technology sector (Nasdaq:QQQ) led the market lower. During the 2008-09 credit crisis, bank and financial stocks (NYSE:XLF) sank the market.
Industry sectors that contain stocks with large market capitalizations (size) always dominate the performance and volatility of major indexes. The 78 technology stocks within the S&P 500 (NYSE:IVV) now represent a jumbo sized 22.23% of the index.
And if we drill down into the top 10 holdings of popular technology ETFs like the Technology Sector SPDR (NYSE:XLK), the concentration in just a handful of stocks gets extreme (See Figure 1).
Say whatever foul things you want to say about diversification, but concentration always works like a charm, until one day when it suddenly doesn’t. This time around, concentration is proving to be a double-edged sword for Cupertino groupies. Along with Apple – IBM (NYSE:IBM) and Google’s (NASDAQ:GOOG) deteriorating performance has been a drag.
Live by the Bellwether, Die by It
Markets fall faster than they rise. It’s one of those uncomfortable truths of stock market investing. And Apple-mania is our finest case study yet.
It took Apple four months to rally 20% (Jun-Oct 2012) but just a little over one month to drop 20%. (Sep-Oct 2012) Right as Apple was topping, we alerted our subscribers with this 9/19/12 update:
“In the short-run, technology ETFs look overstretched, so a pullback to $63-66 zone for QQQ, $27-29 for XLK wouldn’t be out of order.”
Not only did we hit these target zones with precision, but inverse 2x (NYSE:QID) and 3x (NYSE:TECS) are ahead between 15-25% over the past month.