Saturday, December 8, 2012

Market Anomaly in Progress

So Goes Apple - So Goes the Market???

The "So Goes Apple - So Goes the Market" link is now broken. A market anomaly is currently taking place.

Apple's upside breakout has failed. Last week Apple fell more than 6% in a single day. This represents more than 4 times its historic volatility, an anomaly for sure. Apple's overall decline from its peak was roughly 25%.

So why didn't the market fall as well? It is not just Apple that declined quickly and sharply, but a lot of the recent high quality market leaders as well, including some stocks we held. Still,  most of the major indexes remain unshaken. I was baffled by this strange market behavior. I really needed to get my head around this.

As you know I try to keep up to date by reviewing blog posts from the circle of trusted market analysts I have come to respect. I'll credit Pascal Willain, author and creator of the Effective Volume web-site, with giving me insight into the Apple/Stock market conundrum  Pascal is a tireless market analyst and very smart to boot. In a nut-shell, this is how he explains last week's market behavior.

Apple represents about 17% of the Nasdaq Index and about 5% of the S&P 500. It is the most widely held stock in the world. Money is moving out of Apple in a big way, but it is not leaving the market. The proceeds from the sale of Apple stock are finding their way into the dogs of the market, i.e., Hewlett Packard. So while Apple is being driven down, stocks like HP are being driven up; thus, the market averages are not declining. The trading activity in Apple is 5 time the norm.

Apple / HP
 Relative Strength
Comparison Chart

Exacerbating the turmoil is the fact that the president seems unshakable in his determination to raise taxes on the so called rich. As a consequence, companies are paying out special large one-time dividends and investors are selling their winners to take advantage of the current lower capital gains tax rate.

I do not plan on chasing the money going into sub-par companies the likes of HP. Meg Whitman has stated that it will take at least 5 years to turn the company around, dead money.

Even though we were beat up a little lately, I think we need to remain optimistic. Politicians appear to be playing a game of chicken as they comment before the cameras, but the market believes that progress is being made behind the scenes.

When the Fiscal Cliff issues are fixed to some extent I would expect a very meaningful rally in the market. We want to be there when that happens.

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