Wednesday, March 14, 2012

Concerns About the Broad Stock Market--and Apple

There are always many--and often conflicting--indicators pertinent to the likely direction of the stock market.  Despite that, there are three historically reliable ones that currently warrant caution toward stocks.  Transportation stocks have not continued to rise with the broad market and have broken below their uptrend line.  This is consistent with the Dow Theory that new highs in the Industrial Average should be "confirmed" by new highs in the Transportation Average.  Instead of that happening, the transports have broken down, despite signs of improved economic activity.

Second, trading volume has been remarkably light for a market that has been strong in term of percentage gain.  

And third, cumulative breadth (the number of advancing minus declining stocks over time) has been poor.

In addition, the strength in the NASDAQ (+17% over the past year) has been driven largely by Apple, which is now has a 17% weighting in the index.  Apple's 72% gain over the past year accounts for nearly three-fourths of the gain in the NASDAQ.  

Apple is a good example of the challenge of finding reliable guides to the stock market.  Bollinger Bands (a band above and below a stock based on a selected number of standard deviations from a moving average) often are helpful in indicating a stock that is overbought (haven risen quite sharply) or oversold (having fallen quite sharply).  Using Bollinger Bands of two standard deviations above and below Apple's 200-day moving average stock price would have shown the stock to be quite overbought two months ago--at a price of 425.  At today's 590 on Apple, a decision to sell in January would have resulted in missing a further 39% gain.  But for those fortunate enough to own significant Apple shares, its 14-day RSI of 85 (normally 70 is a good sell signal) would suggest selling at least some of the holding.

Steve Lehman

S & P 500:  1393

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