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Apple is the Perfect Pick for This Overbought Market

AAPL remains undervalued despite Nasdaq’s overbought indicators, lack of volume


Yesterday, the Dow industrials finally closed over the 13,000 mark for the first time in four years. And the S&P 500 closed at its highest number since 2008. But rather than a psychological lift accompanied by high volume that would be expected from such a day, the market merely plugged along until, at the close, it managed to hit the new highs. 

Group rotation was healthy yesterday, as the technology sector led along with consumer discretionary stocks, and 7 of S&P’s 10 sectors finished higher. Financial stocks made gains but placed last in the advancing sectors.

At the close, the Dow Jones Industrial Average was up 24 points at 13,005, the S&P 500 gained 5 points at 1,372, and the Nasdaq rose 21 points to 2,987. The NYSE traded 754 million shares, and the Nasdaq crossed 489 million. Advancers were slightly ahead of decliners on the Big Board, and decliners slightly ahead on the Nasdaq.

Nasdaq Chart
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Two sectors, technology and financials, have led the market higher thus far. This is especially true of the Nasdaq, which outperformed the Dow and the S&P 500, this time on the strength of the technology stocks alone. And even though the index appears overbought, the Nasdaq’s big drivers, led by Apple (NASDAQ:AAPL), are not yet overbought by fundamental standards.

AAPL Chart
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Apple broke higher again yesterday after the company announced a March 7 event, which is expected to be the next iPad unveiling. Even though the stock made another new high, Jim Cramer pointed out that it is still selling at just 10 times future earnings of $55 for 2012 (Cramer’s estimate) while the S&P 500 Index is selling at about 13 times earnings. 

But there is a disparity between Cramer’s estimate and The Street’s estimate of $42.72. However, even at The Street’s estimate, the stock is selling at just 13 times earnings and it does demand a higher multiple than 13 because of its huge disparity in growth versus the average stock. S&P targets Apple at $650 within the next 12 months.

If Apple and the handful of other big Nasdaq movers make their earnings estimates, the Nasdaq and the stock market could go much higher. But the lack of volume and the number of overbought indicators does not suggest that most stocks will follow the high-octane route of Apple.

Therefore, we will continue to be very analytical and buy only those stocks that are clearly undervalued. Otherwise, we wait for a correction to load up on our favorites that are currently, pricewise, out of reach.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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