Apple No Longer The Tail Wagging The Dog… At Least For Now – Published in Noozhawk on Monday, March 18, 2013

Apple was the darling of Wall Street, and of many investors’ portfolios, during most of 2012. Due to its massive jump in value, it dominated the overall market’s performance, driving both the Standard & Poor’s 500 and the Nasdaq Composite to impressive gains.

Now, no longer the single, amazing performer dictating market direction — the tail wagging the dog, if you will — Apple has been a disappointment, to say the least. Currently hovering only slightly above its 52-week low, Apple’s dismal performance, for the moment, has not tempered investor appetites for stocks. Going forward, will Apple’s fall continue, signaling an end to the market rally, or will it rebound, driving stocks to new, all-time highs?

The S&P 500 returned 12 percent in the first quarter of 2012, while Apple was up about 50 percent during the same three-month period, with Apple accounting for an amazing 15 percent of the entire S&P 500 return! Apple ended the first quarter of 2012 at roughly $600 per share, and went on to eclipse $700, peaking at $705 in September. Apple ended 2012 at $532 per share, actually below its ending value of $600 at the conclusion of the first quarter of 2012, down 11.3 percent, and down 24.5 percent from its all-time high of $705. The S&P 500 faired a little better between the end of the first quarter of 2012 and the end of 2012, gaining about 1.4 percent.

Since the beginning of 2013, Apple has nosedived, losing 113 points at its worst level of $419 (so far), or about 21 percent on the year, before rebounding only slightly, ending last week at $443 per share, still down about 16.7 percent year-to-date. During this same period, the Dow, (which does not contain Apple), has risen an astounding 1,410 points to reach all-time highs, gaining 10.8 percent year-to-date. The S&P 500 is up 9.4 percent and the Nasdaq has gained 7.9 percent. The Nasdaq, which is very technology heavy, holds about 10 percent of its total value in Apple. For the S&P 500, Apple represents about 4 percent of the index. One can see why, based on these weightings, that Apple can drive index performance, and why the Nasdaq has underperformed the S&P 500 and the Dow year-to-date.

While Apple’s poor year-to-date performance has not been negative enough to temper investor enthusiasm for stocks, further declines in the stock could begin to erode index performance and could end or at least postpone the march to new all-time highs. From a technical analysis standpoint, I could see Apple’s shares falling to as low as $400 before stabilizing and forming a bottom. From present levels, this roughly $50 per share move, which represents about 11 percent from current levels, could be enough to stifle the rally, or trigger a correction. While Apple seems to have lost the leadership role it commanded through most of 2012, I’m not convinced this is a permanent abdication of Apple’s throne as the most valuable company in the world.

If the stock market could absorb a further decline in Apple shares to the $400 level, and wait for Apple to form a bottom, it is entirely possible that a rally in Apple from the $400 level could commence, driving stocks to even higher levels. A sustained rally in Apple from the $400 level back above $500 per share, or even $600 per share, could drive the S&P 500 to 1,650 or even 1,700, if accompanied by strong rallies in other key components, especially within the technology sector. Apple represents 21 percent of the S&P 500 technology sector, and is, by far, the most significant weighting, but there are other companies that also represent large weightings that could contribute.

I feel that a more likely scenario would be Apple continuing to fall toward the $400 level, and if not triggering a sizable correction in stocks, at least contributing to the decline. After as much as a 20 percent correction in stocks, and a fall to around $400 for Apple, I would expect stocks and Apple to form a bottom over some period of time. From that bottom, I would expect to see Apple regain its leadership role and help drive stocks back up, approaching all-time highs before the end of 2013.

Apple faces a lot of challenges, and is not the same company it once was under the leadership and dazzling creativity of Steve Jobs. I’m not sure it will ever be able to match the output of completely revolutionary products and lofty valuations we saw leading into the all-time high reached in 2012. However, I would not count Apple out, and still believe it is a fantastic company with a lot of potential, as long as the stock is purchased at attractive valuations.

Investors can still benefit from keeping an eye on Apple as a proxy for overall stock market performance. Apple is a tremendous gauge of consumer demand, which accounts for 70 percent of the total U.S. economy. Apple is still the trendsetter for technology, and it is likely that it will continue to capture consumer trends for years to come.


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