What Apple is Signaling about a Market Top

February 17th, 2012
in contributors

by Albertarocks

Apple-old-faceSMALLWhen a general stops leading his army mass surrender usually soon follows.  Very often when an index begins to lose leadership from its general the entire complex soon finds itself in big trouble. If there was ever an index that had a singular more important hard-core heavyweight leader than the Nasdaq 100 has in AAPL, I’d like to know what index that was.  AAPL now makes up a full 17% of the market capitalization of the entire $NDX.  So obviously when an enormous corporation like AAPL starts to take a bit of a bruising, it behooves us to take a real close look at what’s going on.  (Click on picture for larger image of apple face.)

Follow up:

The enormity of the effect that AAPL has on the entire $NDX can’t be overstated. Only last April its weighting had been reduced from 22% to 12%. Today, only 10 months later, that weighting has made another astonishing burst back up to 17%. The only other heavy hitters in any index that I’m aware of which even comes close to having the weighting that AAPL has, are Simons Property Group which makes up approximately 10% of IYR (real estate ETF) and IBM which makes up about 12% of the DOW. With a market cap. of $446 billion, AAPL is now slightly greater than twice the size of IBM. The bank account? With $98 billion cash on hand, AAPL now sports a cushion 6 times that of IBM. If AAPL really wanted to buy something nice they could certainly afford it. May I suggest Greece?
Before we dive in, just a few notes for clarification. I don't mean to insult anyone here, but it has come to my attention that there are some people whose eyes glaze over when dealing with a chart that is made up from a ratio. There's nothing to it really. In fact, all currency crosses are the same thing... just a ratio:

a) When viewing ‘any’ ratio chart, think of it as a ‘leadership gauge’. In all cases, what we’re really doing is dividing the component on the left side of the ratio (the ‘numerator’), by the component on the right side. In this particular instance, AAPL is the 'numerator' and is 'the component being judged' for leadership and not the Nasdaq. But of course the ultimate goal of any division operation is to generate the "quotient". It answers the question "How many AAPLs can we buy with one unit of NDX?" We then put that quotient on the chart in the form of the ratio itself... the candlesticks. What we're really after is to reveal what the ratio is doing and what it means for the broader index itself. The purpose of this study is not to discern when to buy or sell AAPL, but the NAS.

b) In order to improve the ‘viewability’ of a ratio-style chart, I’ve changed the way I display them from the method I used to employ, in order to make them far less "busy".. Rather than to overlay the two individual comparators behind the ratio itself, I’ve placed them in the upper section of the chart in separate panels so that they appear as individual line charts. But the all-important ratio, the subject of our focus, is still shown in the heart of the chart as candlesticks. In every ratio chart, any indicators that are displayed pertain to the ratio itself and not to either of its components.

Again, I apologize to those who already understand how ratios charts work, but out of respect for our friends who have been a bit reluctant to admit they didn't know, I just wanted to offer that bit of clarification. We start by taking a look below at the weekly chart of the ratio between Apple and $NDX:

AAPL:$NDX - Weekly - Click here for a full blown live and updating version which includes some indicators. The daily chart can be found here.

The annotations on the chart above make it relatively easy to spot the more important observations but the most obvious takeaway is the fact that the ratio itself has been steadily rising for over three years. This may seem like a fairly obvious conclusion but why is it such a big deal?  Because as with any other ratio analysis, any sideways move or move lower in the ratio betrays the diminishing strength of that leadership.   In almost all cases, loss of that leadership is not readily apparent when we look at the individual components.  And in the case of AAPL, considering that it has risen from 12% weighting in the Nasdaq 100 to the current 17% weighting, this really is a very important relationship to focus on. I suppose that's why I published the first installment of this article almost a year ago.

When we zoom in on the daily chart below we also check the upper panels to notice what is happening with the trend lines (yellow) of the individual components. [You will be able to see them when you click the live link]. What is most notable is that $NDX broke below a major trend line during last summer's correction and has risen to retest it 3 times. At the very least, we are alerted to the fact that the momentum in the $NDX itself is waning At the same time we see that AAPL has never broken its own uptrend line and has in fact exploded to the highest point above that trend line in its history. It threatens to go parabolic. And of course this is because AAPL is an outstanding corporation. The largest and most cash rich corporation in world history if I'm not mistaken. But as blasphemous as it seems to say... those facts are totally irrelevant to this analysis. Because what we're looking for is not how strong AAPL is, but whether or not it continues to lead the $NDX. All we're looking for is for the movement within the ratio. It could theoretically even be a case where AAPL is rising but the ratio is dropping. It simply doesn't matter because when the ratio drops, the NAS drops.

AAPL:$NDX - Daily - Click here for a full blown live and updating version which includes some indicators. The weekly chart can be found here.

And as you can see in the daily chart above, today was a rather serious "OOPS" day.  That is a very, very bearish candle.  It is both a "bearish inverted hammer" with an unusually long body (added bearishness) and a "bearish engulfing" pattern all in one day!  Not only that, but it occurred at a time when there were severe negative divergences in the MACD and RSI. Here's a much closer look at what transpired in the ratio today (February 16).  Needless to say, that is a nasty, nasty candle... something tops are made of to be sure. However, further confirmation is definitely required before anybody could be confident that the top for AAPL is in place. It sure looks like it is, but... it's not confirmed.

So we take a look at the daily chart of AAPL itself to see what could possibly have caused such a bearish development in the ratio.

AAPL - Daily - Click here for a full blown live and updating version which includes some indicators.

And lo and behold, as everyone knows by now, AAPL had a rather nasty day. But as it turns out, AAPL incurred a far worse day today than it has seen in any single week in the past 4 years or more, except for 3 occasions when it had an entire week that was as bad as today alone. The monster corporation dropped an incredible 5.6% off its intra-day high on triple the average daily volume prior to today.

I'd like to make one thing quite clear at this point. The objective of this analysis is not to determine when AAPL has reached its zenith... but simply to observe what is happening with the ratio itself. Of course it's always good to know what has transpired with the two components of a ratio but again, I must emphasize that it whatever it was that caused a ratio to drop, it really is irrelevant to the study. When a hurricane is coming I don't particularly care 'why' it's coming. In past instances, when the AAPL:$NDX ratio began to head lower, the peak in the $NDX was 'already in'. This might be the first occasion when both peaked on the same day. That still remains to be seen since we really only witnessed the very initial warning today.

Just a quick note or two on that very topic. There's no way I could call a top in AAPL based on today's action alone. We would need to at least see the MACD confirm by rolling lower, accompanied by a sell signal from the stochastics. Those two events will happen very, very quickly. If I were an institution holding AAPL stock I'd bail out of it immediately. If I were a bearish minded investor ("If"... that's funny) I would hesitate on shorting that rocket until I saw the 6 day moving average roll lower as well. By remaining that cautious a bearish investor would certainly miss the very top. But that's the price one has to pay for confirmation. Consider it as cheap insurance.

Well there you have it... the first sign that the ratio may be in trouble. If it continues to roll lower in the coming days you can bet your bottom dollar that the peak in equities is behind us.

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