Is Jim Cramer Right? Is Apple Really a Market Barometer?

Last week, on October 28, Jim Cramer called Apple (AAPL) a barometer of the market: "...if Apple's stock price is falling, the markets are clearly headed lower...When Apple goes higher, the rest of the market comes with it." Cramer even goes so far as to say that if he "had Apple on his [trading] screen, he would trade better than most people." See video here.

As with most bold claims like this, no data or evidence was presented to substantiate the relationship. If you know me at all, you know I finally had to take a look at the data for myself.

Since Cramer seemed to imply that the tight correlation between the market and Apple (AAPL) is relatively new, I focused on the stock market action since October 1st - a total of 28 trading days through November 7th. This covers a period of intense selling when it seemed like equities were being tossed overboard in unison and uncaring abandon. I defined "the market" as the S&P 500. Our first comparison is between daily percentage changes in price.

The chart below (click to enlarge) shows a ratio of the daily percentage changes in price of the S&P 500 and AAPL (change in the S&P 500 divided by the change in AAPL). The chart also includes a ratio calculated using the S&P 500's change the day after AAPL's change. 75% of the time, AAPL and the S&P 500 move in the same direction. However, 50% of the time, the S&P 500's price moves opposite AAPL's price the previous day. So, AAPL's close tells us nothing about the market's close the next day. This diminishes AAPL's usefulness as a tell for market direction.
 

Next, let's look at correlations between closing prices. Over the past 28 trading days, the closing prices of the S&P 500 and AAPL have a correlation of 0.32. There is positive correlation, but it is weak (correlation ranges from -1 to 1 where -1 means perfectly inversely correlated, 0 means perfectly uncorrelated, and 1 means perfectly correlated). We get a slightly better correlation of 0.46 between AAPL's closing price and the S&P 500's closing price the following day. The correlations are relatively weak because the magnitude of price changes have little consistency (as shown in the graph above).

Finally, let's look at a 5-day moving correlation (click on chart below to enlarge) in case there is a trend that Cramer has picked up towards an increasing tendency for correlation. Unfortunately, the story is quite mixed here as well. There is an increasing trend only if you remove the first half of October. AAPL and the S&P 500 have gone through short bursts of time during which they've had extremely high correlation, sometimes essentially 1.

So, perhaps we can excuse Cramer for his claim if he has been doing some selective observation. Note that the rolling 5-day correlation is much weaker when we look at the closing price of the S&P 500 the day after AAPL's closing price.

The most notable disconnect between AAPL and the market came the day after AAPL reported earnings. AAPL ended that day (October 22nd) 5.9% higher despite very disappointing guidance. The S&P 500 cratered -6.1%. The next day, the index managed to gain 1.3% but only after first falling another -4.3% in price.

So, when we look at the data, Cramer's claim turns out to be weak except when we look at day-to-day directional moves and exclude the magnitude of price moves. Under these conditions, I would not rely on AAPL as a barometer of the market, but it is understandable that Cramer could make this mistake if he were examining very specific time frames.

As a sidenote, Stephanie Link, who is Director of Research for Jim Cramer's Action Alert portfolio, recommended avoiding Apple on October 26th.

Be careful out there!

Full disclosure: Long S&P 500 in an index mutual fund. For other disclaimers click here.

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Comments

[win:]

I think Cramer may have been speaking of Apple's predictive value. Simultaneous price correlation and the other tools you use would be useless to assess this metric. Instead, I would use a delay of one day and assess AAPL's price correlation with the SP, then 2 days and so on up to 5 days. Then I would do the same on a weekly chart. That is one way of measuring predictive value.

2008 Nov 09 08:47 AM

[Pauly B:]

For me the only two correlations I follow are Jobs numbers and Total Earnings by the S& P. Jobs and earnings down, market down, Jobs and earnings up, market up. They have proved accurate for me and I dont find a single stock predictive but it is an interesting discussion.

2008 Nov 09 09:43 AM

[JohnnyBee:]

I think Cramer was making his argument more philosophically and emotionally than as a technical assertion. He could have been speaking about any high volume glamour stock. Long range, where that stock goes the market will follow. Parsing Cramer’s comments with microscopic analysis misses the “spirit” of what he’s saying.

2008 Nov 09 10:15 AM

[Dr. Duru:]

I did use a one-day delay and results worsened. Both charts show those results. The correlations also include a look at 1-day time lag. I stopped there because I saw nothing that told me it was worth the time to make this analysis even more complicated. Cramer presented no evidence of predictive power (outside of one trading day where the S&P futures were limit down in the pre-market), and I thikn it's dangerous to base investing advice and especially trading advice on "spirits." I would love for someone to take this analysis a step further, but I doubt it's worth anyone's time to do so given what we see here.

What didn't make this copy of my original article is that I also recognize that this analysis does not tells us whether AAPL performs better than any other stock as a market barometer. If that were the case, it is also understandable why Cramer could make the mistake he did.

On Nov 09 08:47 AM win wrote:

> I think Cramer may have been speaking of Apple's predictive value.
> Simultaneous price correlation and the other tools you use would
> be useless to assess this metric. Instead, I would use a delay of
> one day and assess AAPL's price correlation with the SP, then 2 days
> and so on up to 5 days. Then I would do the same on a weekly chart.
> That is one way of measuring predictive value.

2008 Nov 09 12:10 PM

[ajc:]

I think you should have used the nasdaq market as your means of comparison instead of the SP500. Would like to see what the correlation is there.

2008 Nov 09 01:50 PM

[Urbane Gori...:]

I suspect he was trying to say that AAPL was a bellweather in the same vein as Alcoa or GE. I n essence, it's easier for most people (not investors) to keep an eye on a large 'in the news' firm than it is to pay attention to teh gyrations of the market on a daily basis. Clearly though, when it was rumored that Jobs was sick and APPL tanked, the market didn't really go into a nose dive along with it. Nasdaq took a sympathetic hit.

You want to know what's going on with the market, watch the dollar index. As the strength of the dollar has increased, the VIX has increased and the markets have tanked. Just about everything I look at these days either is in lockstep with the dollar/VIX or its inverse. Simplest thing to do is play the ultra ETFs and not get racked back and forth with individual stocks.

In fact, all my charts now have a lower indicator, the MA10 and MA20 VIX.

jegan

2008 Nov 09 04:00 PM

[skibum244:]

Apple is the NASDAQ. If Apple drops then so does the NASDAQ on the most part. It's weighted that way.

2008 Nov 09 04:13 PM

[yousaidwhat:]

Personally, I didn't interpret Cramer's comment as relating to any kind of a real time market relationship. I also thought he was talking about future predictive trends. It's common knowledge on Wall Street that the market requires leadership in order to move forward. Cramer apparently believes that Apple will be the key participant in this leadership. I believe he will be proven right on this prediction. In any case, I guess I can understand how a technician minded person might get carried away with a detailed analysis and think otherwise.

2008 Nov 09 04:46 PM

[managematics:]

If you look at some of Cramer's comments in print as well as on TV you'll get more color on his assertion. He believes that AAPL is a good indicator of overall market sentiment right now. There were days in the period analyzed where AAPL had bad news yet still rose. The overall market rallied even further. One might assert that if it's a day when it can rally despite bad news, then overall sentiment is high.

In this context I don't believe he's suggesting any specific numerical relationship.

2008 Nov 09 07:05 PM

[jmmx:]

It seems to me that there is a pretty good correlation between Apple's direction and the Dow/NASDQ. It frequently appears to move exaggeratedly with the index.

Apple seems to be in this groove where it is at it's psychologically correct value, and is trading with the market. But it is really tautological to say that most stocks on any given day move in correlation with the index of the exchange where they are traded.

I think Apple is in a bit of a schizophrenic state. People see it is doing great and want to get on - thinking it is undervalued. At the same time, people - both others and the some of the very same people - see that it could get clobbered by a deep recession. So - BARRING ANY PARTICULAR NEWS - it swings with the ups and downs of the market.

IMHO

2008 Nov 09 09:33 PM

[bryanz:]

Couldn't you just look at beta to make the determination of correlation to the market's returns? Isn't that what beta is? Beta for AAPL is 1.93 so on average AAPL moves 1.93x whatever the market moves.

2008 Nov 09 10:04 PM

[bearfund:]

AAPL looks a lot like an option on consumer discretionary as a sector. Chart it against long-dated XLY calls, for example. This shouldn't surprise anyone; the company has absolutely no capacity to make anything anyone needs, but as long as people want what they're making there's bound to be hope among the bread and circuses crowd.

2008 Nov 09 11:04 PM

[valueinvest...:]

You mention that Cramer offered no data or evidence to back up this claim. Why would this claim of his be any different than many of his other claims? He often lacks facts and evidence. Instead, he just hopes that if he is loud and silly enough people will overlook the fact that his arguments often lack facts. Cramer while full of sound and fury, signifies nothing.

2008 Nov 10 10:47 AM

[User 265729:]

The real question is this:

Does an apple fall far from the tree?

In Cramer's case, if his parents are both con artists, I would say no. If they were both honest, hard-working professionals, I would say yes.

2008 Nov 10 10:22 PM

[ES:]

Cramer talks too much
And he talks loud

2008 Nov 11 12:16 AM

[Archman Inv...:]

Apple, while a good company that makes fun products, is not the yardstick we should be using to measure the market. It is more the yardstick that measures some level of nonsense consumer spending.

The average american: An over indebted soul, who confused home equity extraction and credit card debt with real liquid net worth.
The USA: a country where we measure our success on how many I-pods we own, how many tattoos, and piercings we get, how much jail time we rack up as a badge of honor, and how many different reality shows we can try out for, instead of doing a hard days work.

We have evolved into a pathetic "reactive" nation of souls who need to be told what to think and what to believe, instead of a the "proactive" nation of the past, that would never stand for most of the stupidity that we now call "normal" in this country.

2008 Nov 11 07:31 AM