Apple Analysis: When Leaders Don't Lead

You’ve gotta love this game! Right is left and up is down! Well, Tuesday night Apple (AAPL) reports blowout earnings, and then sandbags on guidance. Ok, no surprise there! But then, the world turned inside out, because Apple rallied!

I figured we rallied because Apple’s CEO, Steve Jobs, cast a spell over the audience as he pumped the iPhone! By the time he was finished with them, they forgot all about the crappy outlook.

So, I went to bed feeling kind of queasy, like I just lived through some sort of surreal sideshow on the Twilight Zone. I wasn’t expecting a whole lot the next day. I figured if Apple extends the rally into the next day great, I’ll just wait for some topping action, see what the market holds and look for some short plays.

And if Apple doesn’t extend the rally, then no harm, I’ll just sit it out and see what the market will Bear (pun intended).

Well, it turns out that yesterday was a pretty crappy day. We started with futures way down, and things just got worse from there. The Dow had its 7th worst day in history, dropping dropping over 500 points, just under 6%. The S&P didn’t do any better dropping just over 6%, while the Nasdaq had a tough day as well, dropping 81 points at just under 5%.

Apple held most of its gains from the night before, at least in the beginning of the session, and even had a mini rally, but it was all down hill from there. Apple gave back the 12% it grabbed in after hours Tuesday night, and if it wasn’t for the surge in the last half hour of trading, it would have given it all back.

So if you’re a perma-bull you probably got a bit of a charge out of that eleventh hour rally, but don’t get too giddy, because all you have to do is step back and look at what happened. The indexes broke down big time. We closed below trend support of 910 on the S&P and 8650 on the Dow, that’s extremely bearish. In fact, the S&P closed on a new low for this Bear market at 896!

The Tech sector is getting hammered, it’s in full breakdown mode. And the Leaders of Tech, Apple, Google (GOOG), Research in Motion (RIMM) and Amazon (AMZN) all refuse to lead. Not one of these companies can sustain a rally, they’re up one day, then down the next. And when the leaders can’t sustain a rally, neither can the broader market.

Market breakdowns are confirmed with two important indicators, volume and breadth. What I mean by breadth is the number of companies participating in the decline. So, when you have a down market and the volume is at least 20 percent over the average volume, and the number of declining issues out numbers advancing issues, then that’s your confirmation. And today, the Nasdaq traded over 2.6 billion shares, where the average shares traded is usually around 2.1 billion. Also declining issues outstripped advancers by a whopping 6 to 1! That my friends is a classic breakdown!

So the problem for the Bulls is that they’ve lost these critical support levels. And the Bears won’t give them up without a mighty fight, they’ve got all the weapons on their side and they’re playing on their home turf. The only thing that the Bulls can hope for is the occasional good piece of news, that can spark a violent mini rally. But like all the rallies before, it will fail.

We still haven’t seen that classic capitulatory bottom, where the market gaps down, then rallies back on huge volume and breadth. But this is no ordinary Bear market, and so I don’t expect that we’ll see an ordinary bottom. It may take several such events, and it may happen over a lengthy period of time.

Stock position: None.

Comments

[thomasf:]

Zack....I'm trying to like you, but I'm stuggling ;-)

2008 Oct 23 09:59 AM

[AVG:]

Hey Zack, if you want to know why Apple really Rallied you should read your buddy's article...

seekingalpha.com/artic...

2008 Oct 23 10:33 AM

[typopolice:]

zach's now called the bottom 4 times since July...wait, he isn't calling the bottom here yet...3 times...and counting.

He also told everyon to bail at $90 between 10/4-10/6, scaring everyone and telling people he called his dad and told him to go to cash..then watched the stcok move to $115 while him and his sheep sat on the sidelines. His flock is dwindling as they go broke on his advice.
He is selling a new service on his site though, can't wait to see how that turns out for everybody--practically risk free!!

2008 Oct 23 10:56 AM

[Shorting Sh...:]

He doesn't get it. This is not about Apple; its about the economy and the markets. He has chosen AAPL as a prey and is just picking at it.

Event with the 'poor' guidance AAPL should be at $120.

2008 Oct 23 11:25 AM

[Zach Bass:]

I know why it rallied, I talked about it in my blog and podcast from yesterday. Sure you can make the argument that by changing the way they report iPhone revenues was received favorably, but the fact is that fundamentals obviously had little to do with it, otherwise the stock would be up today.

It was all pure emotion. Investors are looking for any glimmer of hope to hang themselves. Trying to rationalize these itty bitty rallies is foolish. Things turn on a dime, until the volatility retreats, we're going to be stuck in this distortion field.

2008 Oct 23 12:27 PM

[chano:]

You really don't know what you are talking about. How on earth do you come to believe you are qualified to speak on investment matters? You really do not have a clue. I didn't look to see whose post this was before clicking. If I had looked, you would not have earned my diss. Every time I accidentally see your posts, I get 'dissy' - you have that effect on quite a few people it seems. Give it up. Become a hairdresser or something.

2008 Oct 23 12:39 PM

[pabs:]

there are so many of these empty articles that say nothing, its irritating when you get suckered into opening the link
mr bass clearly doesnt know what he's talking about and i doubt very much this is his full time job or indeed that he is capable of making money in this field
contrast this horrible content it with someone like the very talented andy zaky per the 'AVG's link above that actually provides informed analysis and opinion
i guess this is pile is the price we pay for democracy

2008 Oct 23 12:46 PM

[Zach Bass:]

It's one thing to challenges one's ideas, it's quite another to make an ad hominem attack without any reference to my analysis. If you want to argue or criticize specific points, then state them. But your criticism is empty.

Andy Z. is an expert at analyzing company fundamentals. I do no such thing. I provide analysis based strictly on technical analysis. I think fundamentals have their place in longer term valuation, or comparative analysis, but quite frankly fundamentals are of little use for determining the direction of stock price, in all time frames (near, mid and long-term).

Determining the direction of stock price is what I do. Fundamentals can have some affect on price during certain events, it can also affect to a degree, a stock's level of resilience to market and sector moves. But the thing that determines ALL price direction is investor sentiment.

And that's what I do. I read investor sentiment and determine the most likely direction a stock will take. So if you don't believe in Technical Analysis or the analysis of Mob behavior, say so. But don't say that my analysis sucks because you don't understand it or that you think TA is a bunch of hooey.

2008 Oct 23 01:11 PM

[Infinite loop:]

AAPL isn't going anywhere until the "market fear" subsides. It's as simple as that. When 99% of the stock buying public are running for the hills how can anyone expect even Apple to move up? That's why I bought long-term out of money puts in January for all of my long-term holdings such as AAPL, and have been shorting the shit out of everything else.

This has been my most profitable year ever. I'm currently up over 160%. It's not hard to tell which way the market is going. It takes years for the market to rise, but 30 seconds for it to fall. Learn Behavioral Finance and you too can make a killing off of the weak minded, short-term thinkers.

Keep up the good work Zach.

2008 Oct 23 01:24 PM

[wallywonka:]

Zach, are you reading investor sentiment or trying to manipulate investor sentiment? There is so much negative manipulation by the terse words used to 'examine the facts' on the part of so many analysts, that it is no wonder that the market is so volatile. The facts are distorted by negative views beckoning readers to click here. There is plenty of discretionary money being spent, cautiously albeit, however we are seeing the Apple stores full of shoppers, quality builders are still building high end houses and the mall parking lots are still full of cars. Not in all areas of the country, true, but California and Florida are not the reference points for the whole country. They are overbuilt along with several other states, but herein upstate New York, people are still spending money on discretionary items like Apple iphones and mac computers, as can be seen from the last blowout earnings report. You would be a fool to suggest in this economy that the next quarter will be great. Apple did it right, but commentators /analysts make fodder of every negative thing that they can lay their hands on in an effort to get readers. You've done the same. Thanks for nothing!

2008 Oct 23 03:37 PM

[Viswakarma:]

I sincerely hope that the World gets of this Stock Market Addiction!!! The original purpose of Stock Markets was to raise capital for productive purposes, and not for trading stocks as though they are baseball cards. The market should be split up into distinct entities based on the type of industries that they represent, and prevent the investors from moving their investments around daily. An yearly movement of investments will give enough time for the investor to get a feel for how good his/her investment is. Quarterly reports don't give much of an information since business trajectories depend on many factors, some are based on business cycles and some are based the decisions that the businesses make.

2008 Oct 23 03:40 PM

[Network Effect:]

@ zach - i think you are spot on - stocks no longer have anything to do with the underlying asset. big money may use the fundamentals of the underlying asset (or company) as a reason to explain why they are trading it a certain way, but only if it suits them. and if the fundamentals contradict their trade, they find some other reason to justify why a stock should trade in the direction that they have traded.

so my question to you is, should a stock have anything to do with the underlying asset? and if not, can you explain how the stock market is anything more than one big scam?

2008 Oct 23 05:05 PM

[Muzie:]

Perhaps we should split the stock market in two.

In one we put a whole bunch of imaginary companies where some monkeys put out imaginary earnings reports with random news. That's where we put all the TA freaks and they can argue all day whether we have a cup and a handle, a heads and shoulders or a black dove inside a tree stump.

Then in the other market we can put all the other real companies where people actually expect stock prices to have a semblance of a relationship with the company's income stream.

2008 Oct 23 06:08 PM

[bobthenoob:]

"I figured we rallied because Apple’s CEO, Steve Jobs, cast a spell over the audience as he pumped the iPhone! By the time he was finished with them, they forgot all about the crappy outlook"

I think Zach has turned into a Cramer wannabe. In the meantime, M$ goes up on the same bleak guidance while Zach like the rest, continue to ignore Apple's 75% YTY growth... apple20.blogs.fortune..../

2008 Oct 23 08:05 PM