Apple, tech stocks, and the state of the market

The S&P 500 is trading near October lows and is threatening to have one of its worst weeks since the June rally began, as tech stocks help to lead the way lower.


As noted by Bespoke Investment Group, technology is the only major sector now trading below its 50-day moving average. If it weren’t for tech’s lagging performance, Bespoke shows how the overall market would already have made a new high.

Apple (AAPL) is among those tech stocks in the cross hairs, since it is the most influential stock on the S&P 500. It has rebounded a bit, but not before it sold off nearly 10% from its all-time high in September. Doubts remain about the success relative to expectations for the company’s iPhone 5, as well as the expected launch of its lower-cost iPad Mini as early as next week.

Apple shares may already have seen their year high, says Barry Randall, manager of the Crabtree Technology investment model at Covestor, who does not currently own Apple shares. Still, he says the market’s pullback in recent days is minor, and that tech stocks overall will soon recover.

Here are Randall’s latest thoughts about Apple, the tech sector, and the overall market direction:

When Apple sneezes, the market catches cold. And this is going to happen whether the reasons for Apple’s weakness are fundamental or technical.

I think the market is simply remembering that September was supposed to be a bad month. Major benchmarks like the Dow and the S&P were up during September in the face of a lot of bad economic, political and company news.

None of that bad news has gone away, and now with Romney’s rise in the polls, there’s uncertainty about the U.S. election outcome. Hence, the market is correcting.

Of course, let’s put this in perspective: The market really never backed up this summer the way it did in 2010 and 2011. So even with this rollback, I’m not detecting a lot of real fear, Small cap stocks did better than all the broad averages in August and September, and that may continue into October.

Apple’s “problems” are unique. The company benefited unduly from the problems with every other traditional big tech firm. Money had to come out of Hewlett-Packard (HPQ), Dell (DELL), Cisco (CSCO) and other war-horses and had to be put to work somewhere. Apple may have benefited in the same way from billions of dollars coming quickly out of Facebook (FB).

Now with Apple fading as much as 10% from its all-time high, that money is not only leaving Apple, it’s likely rotating into other sectors such as retail for the holidays, and possibly energy for the heating season.

The market has historically bottomed around October 7: pre-announcements are ending and all the bad news and guidance gets discounted. Then the autumn melt-up happens as under-performing fund managers go for year-end glory and lower their risk tolerance. If I make a mistake in February, I’ve got 10 months to fix it. By October, I’m running out of calendar pages and as they say in Nascar, it’s time to go.

In other words, I don’t expect this market correction to last very long. And tech ought to recover because of its inherently higher beta.

That said, I also don’t expect Apple to re-test its high before year-end.

Any investments discussed in this presentation are for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments are presented for discussion purposes only and are not a reliable indicator of the performance or investment profile of any composite or client account. Further, the reader should not assume that any investments identified were or will be profitable or that any investment recommendations or that investment decisions made by model managers in the future will be profitable.