What Does the Apple Corp Report Tell Us About the Market? (AAPL)

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Apple (AAPL) recently reported earnings that showed gains on both the top and bottom lines compared to the same period last year. Considering that the stock went on a 20% run to the upside following last year’s report, it may seem a little weird that the reaction this time around has been rockier.

As usual, management expectations had the greatest effect on the stock, and that is the source of the trouble. AAPL’s managers expect that revenue in the second quarter will be in the $50 billion to $53 billion range, which is a troubling drop in anticipated earnings.

The reason the AAPL report is worth examining is that it represents a great microcosm of the macro factors that are driving the global economy:

  • Sales of iPhones, iPads and computers in China were up on a year-over-year basis, but they fell far short of matching the more-than-100% growth rate (on a year-over-year basis) last quarter. Slowing growth in Chinese sales is further evidence that the world’s growth engine is sputtering.
  • AAPL claims that each $1 in international sales is only worth 85 cents because of the current strength of the dollar.
  • Revenue in the next quarter is expected to be between $50 billion to $53 billion, which represents the first drop in expectations since 2003 and the largest forecast drop in 15 years.

Slow growth, a strong dollar and lowered expectations for the near term are turning into a theme this earnings season. Despite the S&P 500’s positive performance on Tuesday, the lack of support from AAPL may turn into a significant headwind.

From a technical perspective (see chart below), AAPL seems to be losing a serious amount of momentum. If we (justifiably) ignore the Aug. 24, 2015 “flash crash,” the stock has completed a large “head-and-shoulders” pattern, with an initial downside target of $96.89 and a more aggressive, standard target of $80 per share.

AAPLchartApple (AAPL): Chart source — TradingView.com

Why AAPL Stock Matters

AAPL is a multinational consumer-products company that is extremely sensitive to shifting consumer demand. The stock represents a significant weighting in the major indexes (It’s the largest stock in the S&P 500) and, therefore, it can influence the overall direction of those benchmarks.

AAPL stock tends to lead declines in the S&P 500 and, it is a rare occasion when AAPL drops and the market as a whole doesn’t trend the same direction. It’s tough to do better than AAPL. Therefore, we feel that continued weakness in this stock is a very negative signal for the market.

An Update on the Fed

The AAPL case is fairly typical of reports we have seen so far this season. Growth is slowing, and average earnings are contracting again. The Federal Reserve is watching the same factors we are, but the Federal Open Market Committee (FOMC) announced on Wednesday that it still feels that risks are “balanced.”

We can’t say what “balanced” actually means to the committee, but, at this point, the market is interpreting this as being slightly bearish for the dollar. It usually takes a day or two following an FOMC report to decipher what investors really think, so it is too early to make firm assumptions here. However, the fact that the Fed did not do anything dramatic means that the current tone of investor sentiment is likely to continue.

InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.

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