As goes Apple, so goes the market

I have written extensively on Apple of late, but to recap, I stated that the chart was going parabolic - the slope was increasing at an increasing rate, or in simple language it was getting steeper and steeper, and that this typically means the stock is about to roll-over.  Here is a current 1-year chart of Apple:

As you can see, the stock peaked and has, in fact, rolled-over and has begun to correct.  Moreover, it has broken down through its 50-day moving average, which is a very negative indicator.  The 100-day moving average is around $525 and the 200-day is around $450.  We need to keep an eye on these levels as well for more possible negative breaks.

As I have discussed, Apple was responsible for about 15% of the entire S&P 500 performance int he first quarter - the S&P 500 was up about 12% for 1Q12, so about 1.8% of that 12% came as a result of Apple's strong performance.  Apple has become such a huge percentage weighting in the S&P 500 (and the NASDAQ Composite and NASDAQ 100), that it has been pushing these indexes around.  As the stock price falls, the weighting also falls, all others being equal, so the negative impact on the indexes will lessen somewhat as Apple declines.  However, as other stocks decline in value, the relative weight of Apple may remain high enough to cause significant declines in the indexes, should Apple continue to fall in price.  

Just today, Credit Suisse reduced its sales expectations for Apple due to lowered expectations for iPhone sales.  I would suggest to you that the wheels are coming off of the cart.  As good as Apple's products are, no company can maintain a market cap this large.  I expect to see Apple get down to the $400 level if not lower.  At or below $400 a share, I will be a buyer, but not until then, and not unless I feel comfortable with the overall level of the market.

Deja Vu All Over Again!

Is it just me or have we been here before?  I am talking about the recently disclosed $2 billion+ loss that JP Morgan just surprised the street with yesterday.  Keep in mind that this loss comes out of a supposed hedged portfolio designed to reduce (yes reduce) risk to the bank by offsetting the risk in their mortgage portfolio.  They claim that they, meaning the CEO Jamie Dimon, did not know this kind of trading or risk-taking was occurring.  Excuse me??  We either have a CEO that is completely asleep at the wheel, or one that is lying and knows that he has traders taking enormous risks and supported it.  Either way it is unacceptable.

Keep in mind that we are talking about trades in CDSs, or credit default swaps.  Yes, you have heard this term before - these are the same derivatives contracts that put Bear Stearns and Lehman Brothers out of business, and caused the entire world financial system to collapse just a few years ago.  Now we have the only U.S. bank that seemed to avoid the majority of the poor decision-making that got us into this trouble, doing the very trading in the very same derivatives that caused the meltdown.  Have we (they) learned nothing??

By the way, they claim the loss is $2 billion, but the problem is that CDSs are private contracts and are therefore extremely illiquid.  Now that everyone knows that JP Morgan is exposed to these trades, they are going to suffer much greater losses when they try to unwind the trades, so the actual losses will very likely be much greater than the $2 billion stated.

A few weeks ago a Wall Street Journal article discussed a trader in the UK known as "The London Whale" who was placing such large trades in the CDS market - a $10 trillion market - that he was moving the market.  Now we find out that this trader was at JP Morgan.  What I think happened was that this trader or the group he works with got underwater and started panic trading to try and recoup their losses, which only exacerbated them, resulting in the current situation.  Where is the supervision?  Why are these traders allowed to place unlimited trades with no size or quantity restrictions and no oversight?  This kind of thing happens over and over again, and they never seem to learn from it.  Often these traders are young guys straight out of business school who have little or no real market or trading experience and they are given complete autonomy and no real supervision or restrictions, and this is the result.

This latest fiasco lends great support to the case for the Volcker rule, which is coming up for a vote this summer.  The Volcker rule will place restrictions on banks and other financial institutions regarding what and how they trade.  There could not be a more glaring example of why, unfortunately, we need external regulation of the financial institutions that this latest debacle from JP Morgan.  JP Morgan would be rolling over in his grave if he knew what these people were doing in his name.  I do not believe in government regulation of financial markets in general, but it is apparent that we cannot depend on the financial institutions to regulate themselves, so we are forced to accept the unattractive by necessary reality of government control over trading operations.  The financial institutions have no one to blame but themselves.

Enough with the rich bashing!

It is easy to blame the nameless faceless "rich" for all that ails the world.  Simple economics tells us that the top earners are also the top investors.  Investment is what drives employment and wage increases.  Our tax system is one of the most aggressive and most progressive in the world, meaning that the more you earn, the more you pay.  Yes, there are a select few that take advantage of loopholes that pay a lower percentage of their earnings that some lower wage earners, but even these individuals still pay literally millions of dollars each year in taxes.  The money they don't pay, in large part, gets reinvested into the economy in the form of investment or savings, both of which drive economic expansion, including employment.  This witch hunt for the "rich" has got to stop, so we can focus on the real issues, which include a bloated government that wastes billions each year, a over-bureaucratized healthcare system again that wastes billions each year, and a tax code that punishes success.

Stocks are NOT cheap as many pundits would have you believe!

Stocks are cheap based on what metric - P/E??  Those who continue to claim that stocks are cheap right now are using forward P/Es and other metrics based on assumed future earnings, which are nothing more than poor guesses based on inflated expectations for GDP growth and by extension company sales.  There is a systematic failure to understand the fundamental weakness in the methodology for calculating these revenue and earnings estimates that underlie these overly optimistic expectations.  Stocks, in fact, are not cheap at all, if you consider the very real possibility that the economies of the globe, particularly the U.S. and western Europe, are NOT going to grow at a robust pace for the foreseeable future.  Even the so-called BRIC countries, lead by China, are slowing significantly.  The overhang of massive debt is crushing any hope of real growth for the economies of the west.  Once investors adjust their expectations to more realistic levels, stocks will no longer seem cheap at current prices.

Stocks bounce as expected

As I stated this morning when I made my previous post at the market lows for the session, stocks were likely to bounce from the 1,340 level.  We got down around 1,343 at the low, which is where we were when I made this morning's post, and we have now bounced to almost even for the day.  The S&P 500, which was down around 20 points at the low, is now off only about 1 point.  Investors are still convinced that any dip is a buying opportunity, but beware, the big picture shows some serious technical damage has been done.  Not only has the S&P 500 rolled over, but the leading sectors, and especially technology are also compromised and look to head much lower.  Techs lead the market higher and are now leading it lower.  I am watching tech to try to determine where stocks will bottom.  I don't expect to see any signs of real support above 1,300.

Stocks accelerate to the downside

The long-awaited correction is in full effect, with stocks accelerating to the downside on renewed concerns over Greece and the Eurozone.  Watch the 1,340 level on the S&P 500 (now at 1,343).  This is the March low, and is the only support above 1,300.  I do not think 1,340 will hold, although we may bounce off of it today, at least temporarily.  I will likely start to add some positions once we get down close to 1,300, although I think we could go to 1,250 or even 1,200.

Don't let the market gyrations fool you!

The stock market can do things to convince investors that they are "missing the boat" when the reality is that the market really isn't doing much of anything.  Case in point - late last week the S&P 500 moved back above 1,400 after sliding as low as 1,357 on April 10th.  Today we saw this major index climb as high as 1,425 before settling for the day at 1,405.  The run from 1,357 to 1,415, which took only about 20 trading days, represents a 4.3% gain.  Sounds pretty good, and if you were lucky enough to perfectly time the market and jump in at the April 10th low, and to sell at today's high, you would have indeed made about a 4% profit after commissions and before taxes in a very short time-period.

The problem is that no one is that lucky consistently enough to short-term trade the market; at least no one I have ever met or heard about.  The reality is, in fact, that virtually everyone was either in the market or out of the market during this time, so no one really benefited from this short-term pop in the overall market.

More to my point... the market really hasn't done anything over the past several months.  In fact, the S&P 500 was above 1,300 in early January, and broke 1,350 the first week of February.  It surpassed the 1,400 level in mid-March. (I sold a significant portion of my portfolios just after this.)  So, over the past 6 weeks, the market has gone down a little and back up a little, basically right back to where it was 6 weeks ago, so again, unless an investor got really lucky, the market hasn't provided any real returns for at least the past 6 weeks.

To watch the financial media each day, one would get the distinct impression that the stock market was rallying fast and strong, making people money hand over fist.  And while it is true that the Dow Jones Industrial Average did close at its highest level since December 2007, all three major indexes closed well off of their highs, especially the NASDAQ Composite, which had been up over 40 points during the trading session, but closed ahead by only 4 points.

It is easy to get caught-up in the frenzied atmosphere manufactured by the financial media, which thrives on positive market information.  However, investors should temper their enthusiasm for joining the mindless crowd, and make investment decisions based on fundamental and technical facts, rather than the ramblings of fools like Jim Cramer and company.  Investors need to ask serious and important questions, such as: What is the realistic upside potential for stocks from current valuations, in the short-, intermediate-, and long-term?  How confident can they be in the overly optimistic earnings projections provided by investment firms that fired all of the best analysts on the street years ago, most of which have major incestuous relationships and therefore conflicts of interest, since they perform investment banking services for the same companies they are recommending?  If the financial media is telling everyone on the planet how great things are, how many people out there are still waiting in the wings to buy this rally?

I could go on and on, but the point is that it is very easy to get sucked into the hype and make bad decisions with good money.  Don't be hypnotized by the media.  They are idiots, and they don't care at all if you lose money.