Dow Jones Industrials Come Calling for Apple Today

After many years of speculation and a healthy 7 for 1 stock split to boot, the folks at Dow Jones finally added Apple into the venerable Dow Jones Industrial Average effective the close on March 18. This had to be one of the worst kept secrets on Wall Street for years. As I mentioned in my 2015 Fearless Forecast, I thought this would happen in 2015. There were no excuses left not to add the tech giant and bellwether. In two days, Apple will be in and AT&T will be tossed to the curb.

Does this really matter for the Dow?

Yes it does in a big way. Unlike the S&P 500 which is weighted by market capitalization or value of the company, the Dow is uniquely weighted by price with a divisor. In the simplest of terms that means that a $30 stock stock going up $1 has the exact same impact as a $200 stock going up by $1, which doesn’t make a whole lot of intuitive sense. Apple and Visa typically rise or fall several dollars each day, but lower priced stocks like AT&T almost never see that kind of price movement.

In short and without getting too technical, as of the last Dow Jones Industrial Average change in 2013, a $1 move in a component stock equals 6.42 Dow points. Now, imagine what the impact will be when Apple joins and AT&T leaves. You can expect more volatility in both directions. In a bull market, the more expensive stocks can juice the index to much higher highs. In reverse, the index can suffer mightily during a bear market.

Before the Apple bulls start popping champagne corks to celebrate, entree into the Dow may not be all candy and dancing elephants. History shows some perverse results with companies leaving the index far outperforming those joining the index. And who could forget Dow Jones adding Microsoft and Intel in late 1999, just as the Dotcom bubble was about to burst.

Since 1991, stocks added to the Dow had a median 12 month return of 12%, but an average return of 6%. Stocks removed from the Dow saw returns more than 25% better than those added and even better of late although my research had a few holes for the stocks leaving the index.

In short, Apple bulls would be best served to expect increased volatility and a period of intermediate-term underperformance from being added to the prestigious Dow Jones Industrial Average.

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So Far So Good!

Just two ago, I wrote about the stock market “groping” for a bottom and laid out a scenario for that to begin on Wednesday. The beaten down Russell 2000 was the key as it very quietly had been outperforming the market for three days. That behavior is not what you typically see if a crash was unfolding. Our indicators and systems backed up my own thoughts and our equity strategies went to maximum exposure at the close on Wednesday.

When I woke up Thursday morning and saw the global stock markets in collapse, I thought it was going to be a truly interesting day. With so many things looking good a few hours earlier, I was either very wrong, which has happened before and will happen again, or this sharply lower open was an absolute gift to the bulls. At this point I am very glad I stayed the course and even took what I would classify as personal gambles at the open by buying oil and shorting the VIX.

After the lower open, stocks staged a very impressive comeback and the internals looked much better along with sector leadership. Our own flagship sector strategy has had a very tough month coming in to this week, but as with the Russell 2000, it bucked the market downtrend and closed higher on Tuesday, Wednesday and Thursday. For the past week or so, I have strongly suggested that clients add money right away as this correction was nearing an end. And I followed my own advice by making my kids’ college fund additions as well as my 2014 retirement plan contribution into the market weakness.

Time will tell if we just saw “THE” bottom or “A” bottom, but even if stocks don’t go right back to all time highs, the preponderance of evidence suggested a good rally was close at hand. There are two scenarios I am watching now and I will spell those out in the Street$marts edition I am currently writing.

Remember, the largest one day stock market rallies usually occur after a decline. In 2008, we saw 4-8% one day moves many times. The larger the decline, typically, the larger the snapback. If you hated certain stocks, ETFs or funds on the way down, use the strength to rebalance your portfolio the way you want.

I am keenly watching how the plain vanilla high yield (junk) bonds funds act now. They are very stretched to the downside and are supposed to rally smartly. It’s put up or shut up time for the short-term, intermediate-term and perhaps even long-term.

Finally, I mentioned watching Apple and Netflix for signs of leadership. Apple hung in really well and should see new highs this quarter. Netflix announced bad earnings and was bludgeoned. IF this is the final rally of the bull market, IF, I would expect the rally to leave many key stocks behind. In other words, it would be narrow. The rising tide would not lift all ships. Again, IF.

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Stock Market Groping for a Low

If you woke up this morning, turned on the computer or TV and saw another Texas healthcare worker with Ebola, European markets under siege yet again and our own stock market futures in collapse, you probably did not feel so great. Anxiety? Panic?

As the morning progressed and our stock market opened, your saw an immediate mini panic with the Dow down 370. At the same time, the 10 year treasury note’s yield absolutely and totally collapsed under 2%. That is capitulation in stocks and flight to quality or safety in bonds. Heading to the exits en mass. Throwing the baby out with the bathwater. Choose any cliche you want.

(Side note. Our Global Asset Allocation strategy has owned treasury bonds almost every day this year and today is the first time we are seeing a sell signal in that asset as its price has spiked to unsustainable levels.)

Is this “A” bottom or “THE” bottom or even a bottom. We should know more by the end of the day. If stocks rollover yet again during the afternoon and close below the lows of the morning, the panic is likely to follow through until we see another panic set up. If, however, stocks can hold the morning low and firm throughout the day, even to still close down, that would be a good sign that at least a bounce, if not full fledged rally is here.

The Russell 2000 index of small cap stocks, which has been bludgeoned since July has performed very well this week on a relative basis. And so far today with stocks taking it on the chin early, small caps fought back to unchanged. This is bullish behavior and not typically what we see if stocks were on the verge of additional collapse or even crash. It will be VERY telling to see how the Russell 2000 ends the day.

Besides the small cap stocks, Apple and Netflix have been pillars of relative strength of late. When stocks finally bottom and bounce, I would closely watch these two large caps for leadership.

On the sector front, none have been spared the carnage of the last month with energy being decimated the most, close to the point where they have performed so poorly, it’s actually good going forward. I remain positive on REITs, biotech, transports and semiconductors for now, but that should change with the heightened volatility from day to day and week to week.

I fully expect wild swings today and probably the rest of the week.

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Apple Is Still Vulnerable, Could Test $250 in Bear Market

A familiar and often controversial topic over the past year or so has been my very negative forecast for Apple. As you know, we do not buy or sell individual stocks as part of our investment strategies but used to view Apple as THE market leader and now a bellwether stock.

Long-term, nothing has changed in my view, but I do think a potential rally is setting up that could take the shares into the mid $500s. I will discuss this in more detail in the next issue of Street$marts shortly.

Below is the interview I did with Matt Nesto at Yahoo Finance as a follow up to previous Apple segments.

CNBC’s Fast Money TODAY in the 5:00pm Hour

I am going to be on CNBC’s Fast Money between 5:05pm est and 5:35pm est today, January 14, discussing my long-term negative forecast on Apple and what it means for the stock market in general.

Apple Turning Around

This morning, you likely received an email with Apple in the subject line and no content. I apologize for that! I was in a Philadelphia hotel room on the way out and I thought I hit “paste” and send. Obviously, my fat little fingers missed a step. When I received it on my phone, my first reaction was, NO! It reminded me of those unscrupulous Dotcom bubble stock touts who would send emails with either the company’s name or stock symbol and little else in the email. These were typically pink sheet or micro-cap stocks that could be easily manipulated. Traders and investors would speculate and buy the stock, forcing its share price higher only to allow the tout to sell into the rise. Some folks call this “pump and dump” and it’s been around forever in the markets. And it is illegal. Anyway, I certainly did not intend to just send the word “Apple” and I would never “pump and dump”! So I am sorry again.

When I got home earlier this evening, I wrote the article about Apple once again. This time as I hit send, the website froze and I lost all of work for the second time today. So I am wondering; is someone upstairs trying to tell me something?!?!

Without further ado, here we go on Apple…

For a long while, as you know, I have been fairly negative on Apple the stock, forecasting a possible 50% to 70% decline by the time the next bear market in stocks ends. It’s not about their products or management, although losing Steve Jobs is definitely a major negative, or any accounting irregularities. As my kids tell me, Apple’s products are incredible. Rather, this is purely sentiment call.

Apple has become a cult stock ingrained into our investing fiber. From a crisis low of roughly $78 to 2012 high around $700, this stock soared into rarified air in fairly short order. It’s the stock everyone is supposed to own according to the masses. Over the past year, whenever I offer a contrarian forecast, people scoff at the notion that their beloved Apple could decline for more than a few days or week. After media appearances where I forecast massive losses ahead, people post nasty comments about me online.

Apple has become the classic story stock of which there is at least one in every single bull market over the past 100 years. Google, AOL, Yahoo, IBM, GE, Exxon, Chevron, RCA, Xerox, GM, Avon, Navistar and on and on.

Can you guess the ONE thing they all have in common?

Ensuing bear markets decimated them 30%, 40%, 50%, 60%, 70% and even 80%! Now, some of those story stocks did recover, like Google, but not to the degree of the previous bull market. In most cases, the companies matured and their best rates of ascent were long gone.

I have heard all the nonsense about Apple’s price to earnings ratio being modestly at 12 and it’s actually severely undervalued. You know what I say? So what! Go look at the P/Es of the banks and homebuilders in 2006 as they hummed along. They were mostly SINGLE DIGITS! How did that work out for them?

Before you stop reading and think this is all just another hatchet job on Apple, stay with me please. While my forecast remains for a massive decline in Apple before the next bear market ends, Apple just hit my initial downside target of $500 yesterday. Why does that matter?

For the first time since June, Apple looks like it is in a position to rally smartly from its $519 close yesterday. At its worst, we saw a 28% decline from $700 to $500. Recouping half that would not be out of the question if the overall stock market remains stable. On the flip side, Apple is not “supposed” to close below $500. If it does, the short-term bullish scenario is out the window and selling will likely accelerate to the downside. That does offer a favorable risk/reward ratio though.


Some of you continue to ask why I focus so much energy on Apple. Simply put, it has such outsized weightings in the major indices like the S&P 500 and NASDAQ 100. As we saw over the summer, it can literally carry the market on its back.

For full disclosure and transparency, I do not directly own any shares of Apple. My exposure both personally and professionally is in positions we currently hold in the major indices like the S&P 500 and NASDAQ 100.

As always, I look forward to your comments and questions!


P.S. PHEW! I finished the article and got it posted without losing it for a third time!

Will the Country Even Function on January 1?

The latest Street$marts has been posted!$marts20121221.pdf


Bulls Draw Line in the Sand

It certainly took a while, but the bulls finally drew a line in the sand and defended their turf after a 9% pullback from the September peak. The day started out like many others during the decline with weakness to new lows. But after the “geniuses” in congress held a press conference and all agreed to compromise (Gee, what a word!), stocks lifted and ran higher into the close as monthly options expiration and short covering ahead of the weekend most likely helped the cause.

Keep an eye on everyone’s favorite or former favorite, Apple, as this stock has been hit with the ugly stick and will likely bounce hard when and if the overall market does.
Next week is a holiday shortened week that has a positive seasonal bias. I would look for the bulls to make some noise early.

German Courts and Apple

Markets breathed a collective sigh of relief after the German courts ruled “favorably”, allowing the European bailouts to continue.  Apple unveiled its latest iPhone as the stock sits near all time highs.  Both events did not inspire the markets to do much other than digest as they awaited the Fed’s 12:30pm announcement on Thursday. 

By the end of the week, the markets will have digested the ECB’s latest pledge to buy European debt in  a HUGE way, Apple’s new phone, the German court ruling and the Fed’s latest plan for more money printing.  Now that’s a month’s worth of news in one week!

As I wrote about in last week’s Street$marts,$marts20120905.pdf, the market was following the more bullish of the two bullish scenarios I spelled out.  At this point, it may get really interesting with all time highs in the Dow just under 1000 points away! 

In the next issue of Street$marts due out next week, I will review the various canaries in the coal mine and see how they are behaving.

Apple in the Spotlight… Again

It’s been a while since I mentioned Apple, but the action of late deserves comment.  After peaking in April with the broad market, the stock declined into May with the broad market.  But when stocks declined further into early June, Apple did not follow suit by making a new low.  Rather, it formed a higher low than it saw in May and that was the first clue that it was ready to rally again.

This week, Apple made an all time high at almost $675 before reversing on Tuesday.  In the short-term, the odds favor some downside, possibly into the $630s, but over the intermediate-term, there should be some upside left before the final peak is seen later this year or early next.

As I have written about before, each and every bull market has at least a single story stock or more.  2007’s top was Google.  2000 was Yahoo and a host of other Dotcoms.  We researched back to the 1929 peak and found similar mesmerizing stocks in every bull market.  Of note, each and every story stock declined by at least 40% when all was said and done.  I believe the same lies ahead for Apple, everyone’s favorite company. 

Just like with Google and Yahoo and IBM and RCA and GM and Zenith, the masses always think that this time is different.  The story stock has no competition and rules the world.  There are always reasons why the stock won’t be like its predecessors.  I get that every time I speak publicly about Apple.  Sadly, investors will be left holding the bag without a plan. 

Don’t expose yourself to that kind of risk.  Put a plan together on when and why you should sell or hedge the position, possibly with options.  Profits are a great thing!  Keep what you have earned!!