Is Apple bad medicine for a rising stock market?

iPad, stock market chart

It’s obvious lately that the “What goes up must come down School of Market Analysis” hasn’t been working very well. In fact, unless you have been holding Apple Computer (AAPL) since the end of September, it hasn’t been working at all. Unfortunately, that’s always the way it is with the buy and hold strategy which is nothing but a one note sonata beginning with “Buy.” “Sell” rarely enters into the equation. But eventually that Apple, or Cisco, or Enron, or lest we say, S&P 500, make long-term tops and begin moving lower. The “Buy and Holders” will continue to do what they always do – give back what they have already made and wonder why. A frantic search of earnings reports and other arcane data will be made in an attempt to determine “WHY” prices are selling lower. The answer? There are more sellers than buyers and the trend has changed. That’s it. Adjust or lose.

Back at our drawing boards we are still confronted with a market that doesn’t appear to be doing what we think it ought to do. It keeps inching higher in the face of indicators that, while they have improved somewhat, are still confronted by a band of resistance created back in the spring of 2011. We know that the S&P rallied 106% from March 2009 until early May 2011, but since May 2011 the bellwether has only added a little over 10%, assuming an investor bought the highs of May 2011 (1370.58—S&P 500). In fact, the “gain” finally squeaked above the 10% last week after refusing to better that level for most of the previous two years. Some will point to the Value Line index as a stellar performer recently, but the fact is the VAY relative to its 2011 highs is only up just over 11%. Hardly ripping unless you bought VAY options last November.

Market Overview – What We Know:

• Major indexes posted gains again last week as S&P 500 moved to best level since October 2007 while Value Line index hit new all-time high. Dow 30 also rallied to new short and intermediate-term highs. NASDAQ Composite continues to lag.
• All cycles, including Minor, Intermediate, and Major, remain positive.
• Market volume rose 36%, but previous week only had four trading sessions due to Monday holiday
• To suggest short-term negative, S&P 500 must sell below lower edge of 10-Day Price Channel (1485.71 through Monday). Intermediate Cycle remains positive until S&P declines below lower edge of 10-Week Price Channel (1395.00 through February 8).
• Daily MAAD popped to new short-term high last Friday, was marginally “Overbought” at 1.30, but continues to remain below resistance made last March 20.
• Weekly MAAD has moved above resistance created last September, but remains below long-term downtrend line stretching back to mid-1999. Weekly MAAD Ratio is “Overbought” at 1.76.
• Daily CPFL hit new short-term high last Wednesday and is fractionally above resistance made last September. Daily CPFL Ratio was “Overbought” at 1.81 while the Weekly Ratio was overheated at 1.76.
• Cumulative Volume (CV) confirmed S&P 500 strength last week to a new intermediate high, but remained relatively weak in S&P 500 Emini, Dow 30, and NASDAQ Composite.

So can this bull trend that has been underway for nearly four years, in the face of increasingly lackluster indicator performance relative to higher pricing, have the power to overcome major resistance made in October 2007 when the S&P closed at its highest level (1565.15) on October 9, 2007 and its highest intraday level (1576.09) on October 11, 2007, levels that are a little under 4% from current S&P bids?

To answer the question, let’s wander back to Apple. AAPL made a long-term low at 78.14 in January 2009. Its price rallied to 705.07 on September 21, 2012 and that Major Cycle advance was virtually uninterrupted in terms of the lower edge of Apple’s 10-month Price Channel for nearly four years. But then the week of October 12, 2012 AAPL sank below the lower edge of its 10-Week Price Channel at 629 and then the lower edge of its 10-month Price Channel at 508 on December 31 to confirm a negative reversal of the uptrend begun in January 2009. What could be even more disconcerting for those still holding AAPL, if they knew, is that Cumulative Volume in the stock is currently plotted at a level equivalent to an AAPL price of 205.and nearly 250 points below current bids. Unfortunately, many probably continued to hold AAPL because the broad market was still rising. Bad bet.

Daily S & P 500 Emini Futures contract with Cumulative Volume (CV)

Weekly S & P 500 Emini Futures contract with Cumulative Volume (CV)

What was the dead giveaway that AAPL could be in for some tough sledding after it reached that high at $705.07? Momentum did not confirm the new high, nor did Cumulative Volume. Both peaked back in April 2012 when AAPL hit 644. That was the statistical high and thereafter gains into the eventual peak in September 2012 were fueled by weaker hands. Sound familiar? Bottom line in AAPL? The points at which AAPL reversed its long-term trend were the points at which the “EXIT” flags were flying big time. Unfortunately, many folks did not see those flags and will continue to hold AAPL all the way down to whatever low it finally hits. Simply put, the long-term status of AAPL has switched from one of Buy and Hold to one of Sell on strength.

Note: Stop levels, a function of the extant trend, are based on the trailing moving average price channels for the Highs or the Lows of an index. Whether or not a specific index is suggesting a “Buy” or Sell” is determined by whether or not index prices are above or below the current channel Stop levels. Stop levels should only be used as an entry or exit guide and in conjunction with other market entry and exit strategies.

Apple’s dilemma will ultimately become the dilemma for the broad stock market. At some point a top will be put in place, probably sooner than later, and each of the cycles we follow will begin to give way on the downside. First the short-term trend will break, then the intermediate, and finally the long-term. The fact that market pricing appears to be in a defiant mode to the extent prices keep rising in the face of weak indicator confirmation is only a matter of market semantics. In fact, we are going to contradict ourselves here by saying that, “Yes, what goes up must eventually come down.” Our proof? AAPL. In fact, AAPL could be leading the market.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD perked to new short-term high Friday, but strength in indicator since December 28 S&P short-term lows has not equaled first leg up in MAAD after November 16 intermediate low and bottom of first short-term low. What that variance suggests is that the move up in S&P 500 over past month has been inferior in quality to first part of intermediate-term rally. While that observation would seem to be at variance with obvious market strength, it is the point at which the majority thinks prices will continue higher that indicators at odds with pricing take on greater importance.

Admittedly, our Weekly MAAD series has demonstrated increasing strength over the past couple of weeks by moving above resistance at the September highs, then the March 2012 indicator highs. But the spring 2011 peak has yet to be overcome, nor the downtrend stretching back to the spring of 1999. Given the proximity of index pricing to the 2007 highs, pricing “Overbought” conditions on all cycles, and ongoing indicator divergences, it’s going to be interesting to watch this one play out.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Daily CPFL rallied to a new short-term high last Wednesday, then pulled back a bit. The uptrend begun in December 2011 remains intact and with CPFL now above resistance on the daily trend created last September, the indicator could be construed as being “positive.” But the fact is, both Daily and Weekly CPFL are “Overbought” at 1.81 and 1.76, respectively, and the indicator is nowhere near overcoming major resistance created nearly two years ago.

Which means that while options players have participated in this market since the spring of 2011, but they have done so at a diminishing rate as compared to options buying off of the March 2009 lows.

Conclusion

Interesting isn’t it that by the time the financial press divines that something is wrong in a particular issue, a large part of the damage is already done. Apple Computer is no exception to that rule. The points at which the stock, as we outlined earlier, became first an intermediate-term sell ($629) and then ultimately a long-term sell ($508) were totally unknown to most investors holding the stock – and the media. Sure, there were astute traders exiting the stock all the way down from its all-time high at $705.07, but the sad truth is that most investors probably bought AAPL late and well off its long-term Buy signal and will continue to hold it long after the party is over even though Cumulative Volume is suggesting AAPL ought to be trading closer to $200 that $450.

The broad stock market will also be no exception to the “too late in” and “too late out” rule, because most investors always buy and sell for the wrong reasons, one of which is that they are always looking for justification to hold a position other than what pricing and volume are actually saying are the real justifications.

We continue to believe this stock market is far closer to a Major Cycle high than not. Whether or not new highs above the 2007 highs follow remains to be seen. It’s a toss. But when this market does turn lower, it will do so as it has always done – without warning. Unfortunately the majority of investors will be caught flat-footed just as they were caught by AAPL. And why? Because they have no exit strategies.

*Note: Unchanged issues are not counted.

**Note: All data is for calendar week ending on Friday even though ending date may be a holiday. Unchanged issues in MAAD calculations are not counted.