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Apple - Will The Curse of the $500 B Club Sink Stocks?

Mar 03, 2012
Simon Maierhofer

It's said that size matters. That's certainly true when it comes to market capitalization. Here's why Apple's spike into the $500 billion club is troublesome.

537.54 is an important number for Apple. Why? $537.54 marks the level that pushes Apple into a very elite echelon, the $500 billion club. But size has been a curse and all previous members were kicked out of this club rather quickly. Thus far, Apple was only allowed to stay for three days. Here's why that's significant for every U.S. investor.

Apple has become huge and as Apple goes, so goes the market. For better or for worse. That's a bold statement, but here's just how integral Apple is to U.S. stocks in general and what headwinds the company is facing.

How Huge is Apple?

Based on market capitalization, Apple (NasdaqGS: AAPL) is the most valuable company in the world. With its recent surge in shares, Apple became the first company to be valued north of half a trillion dollars since ExxonMobil in July 2007.

As a comparison, ExxonMobil is valued around $390 billion. Microsoft’s market cap is around $250 billion, Google’s around $200 billion, IBM around $220 billion, and Wal-Mart around $210 billion. Since January 2007, AAPL has surged nearly 500%.

In the fourth quarter of 2011, Apple reported a profit of $13 billion. The amount that S&P 500 earnings beat the average analysts' estimates drops by about two thirds when Apple's profits are excluded.

Apple = Gains

That’s all impressive, but it doesn’t illustrate Apple’s true gravitational pull on the broad stock market. The following performance numbers drive home the point.

AAPL: Year-to-date up as much as 32.20%
Technology Select Sector SPDR (NYSEArca: XLK): Year-to-date up as much as 15.68%
(XLK exposure to AAPL = 17.38%. AAPL biggest component of the index)
Nasdaq-100 (Nasdaq: ^IXIC): Year-to-date up as much as 15.65%
(Nasdaq-100 exposure to AAPL = 16.74%. AAPL biggest component of the index)
S&P 500 (SNP: ^GSPC): Year-to-date up as much as 9.18%
(S&P 500 exposure to AAPL = 3.87%. AAPL biggest component of the index)
Dow Jones Industrial Average (DJI: ^DJI): Year-do-date up as much as 6.63%
(DJIA exposure to AAPL = 0%)

When it comes to index investing, APPL is obviously an important ingredient to success.

The $500 Billion Club - A Curse

Apple is the sixth company to enter the exclusive $500 billion market cap club and many analysts (I'm not one of them) expect it to be the first company to reach the $1 trillion mark. The five previous companies were Microsoft, GE, Cisco, Intel and Exxon.

Microsoft, GE, Cisco and Intel recorded their valuation top tick between July 1999 and September 2000; Exxon in July 2007. The March 4, ETF Profit Strategy Newsletter warned that neither timeframe was a good buying opportunity. In fact, every stock was "kicked out of the club" shortly after entering and broader markets like the Dow Jones (DJI: ^DJI), S&P (SNP: ^GSPC), and particularly the Nasdaq (Nasdaq: ^IXIC) cratered thereafter.

What's Next for Apple?

Apple's March 1 all-time high at 548.21 occurred against weakening breadth and momentum. Even as prices charged to a new high, the Relative Strength Index and McClellan Oscillator did not.

We are also mindful of Apple's announcement to unveil the iPad 3 this week. Shares rose 1.84% on the news (last week). When Apple introduced the iPad 2 last year, the stock also rose 2% following the announcement, peaked the next day and entered a six-month correction.

Because of this combination of bearish facts, the March 4, ETF Profit Strategy update recommended to short the Apple-rich Nasdaq-100 as soon as it breaks below 2,636. Why 2,636?

The chart below shows a clearly defined multi-month trend channel. As the Profit Strategy update brought out, such a break below "will spell trouble for this tech-laden index and the stock market in general."

                         

APPL and the S&P

The S&P has reached the progressive up side targets outlined by the ETF Profit Strategy Newsletter. The S&P's run started in October. On October 2, 2011 the ETF Profit Strategy update stated: “Even though October has hosted some ugly bear markets, it has also killed its fair share of bear markets. I don’t think October will kill this bear market, but it should spur a powerful counter trend rally. From a technical point of view this counter trend rally should end somewhere around 1,275 – 1,300 (in Q1 or Q2 2012).”

The January 29, 2012 ETF Profit Strategy update said that: “Prices below the first trend line (1,328) keep the pressure on the down side while prices above the first trend line allow for the second trend line (1,365) to be tested.”

The February 26, ETF Profit Strategy update warned that: "1,365 - 1,382 is a strong cluster of resistance to overcome and unless the S&P clears the 1,382 resistance, a correction starting between 1,365 - 1,382 seems likely." The March 4, ETF Profit Strategy update highlighted trend line support at 1,369 and recommended to short the S&P once it drops below.

How to Trade

Obviously, stocks are respecting certain trend lines and support/resistance levels. Apple is showing weakness and the Nasdaq-100 and S&P have broken below multi-month support. Why not allow such key levels to guide your trading activity?

The easiest and most effective way to navigate this kind of market is via tried and true support/resistance levels. It's simple and effective: A break above resistance keeps the trend up while a break below support opens the door to much lower prices.

The bonus of this approach is two-fold: 1) Investors can profit to the up or down side and 2) Investors will not lose out on the next big move.

The ETF Profit Strategy Newsletter continuously outlines important support/resistance levels needed to follow this strategy and provides a no-nonsense short, mid and long-term outlook for stocks along with the accompanying ETF profit strategies.

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