More Proof the Bear Rally Is Over

One week ago I posted that this bear rally was coming to an end. Actually the post was intended to be a scathing review of a few Apple (AAPL) analysts that are doing a disservice to investors by inventing this cloak of invincibility around Apple. Well, no company is safe in this market, least of all a consumer driven company like Apple. So, this post is further evidence that this bear rally has come to an end and that Apple is likely decline even further.

Last week we lost the 20 day moving average with some force. I felt at that time that it was just a matter of time before the markets moved lower to retest the November lows. But then we got an artificial infusion of hope from our government when the Fed cut bank lending rates to zero and the promise to throw everything including the kitchen sink at this economy. It was an act of desperation that is doomed to fail. In my view, the Fed has dealt its last card and has all but admitted that we’re heading towards a depression.

Well cutting the rates to zero gave the Bulls a new ray of hope, as the S&P had the chance to challenge the 50 day moving average. The Bulls knew that if they could capture the 50s, then there was a good chance to continue the rally and extend the hope. The problem is that all past Fed exploits designed to inject optimism and confidence into investors has failed, so why anyone would think this move is any different is beyond me. In any event, the 50s proved too much as we rejected that level soundly yesterday (Thursday, December 18) and essentially negated the effects of the rate cut.

From a technical point of view this rally has been setting up into a rising wedge, which is a bearish reversal pattern. The past few days have solidified the pattern, and now we’re on the cusp of breaking down. The Bulls have lost control, and the Bears are now in the driver’s seat. The S&P closed just above the critical support trend line of the pattern which is at 880. On Thursday evening, the after hours futures were pointing towards a gap down. If this position holds into Friday morning and we gap down below 880, then the probability is that the markets will drop hard and the pattern will play out, and in time we will revisit the November lows.

Apple has been a relative poor performer in this rally. While the S&P and and Nasdaq have rallied and maintained a 20% gain off the bottom, Apple has given back 50% of its gain. More importantly, Apple has fallen below its critical support level of 95. The next support level for Apple is in the 84 to 85 range. So, if we gap down Friday on the S&P, then I would suspect that Apple will also drop to this support level. If we continue lower on the indexes over time, as I suspect we will to test the November lows, then Apple will likely test its low as well, which is 79.14. I believe it’s possible for Apple to breach this low, but it should show very strong support in the 72 to 74 range.

Disclosure: Short SPY.

Comments

[Roger Knights:]

It may be that the in-the-know traders who have "sold (short) on the rumor" of Steve Jobs's ill health will "buy on the news" of his non-appearance at MacWorld. They'll surely cover if Apple's late-January earnings report beats expectations significantly. (Perhaps aided by announcements of refreshes to some components of its desktop Mac line at MacWorld in early January.) Stocks can behave in that sort of counter-intuitive fashion. If Apple-knocking traders notice that "the bear" seems to be devouring the laggers in the PC market, not the leaders, they'll short Apple with much less conviction--and maybe move on to other opportunities.

I agree that the market as a whole is headed for a big down-leg, but I think Apple IS "invincible" (for the next half-decade, anyway). My target is double Huberty's: 190 in 12 months (and 1000 in ten years). I believe pro-Apple analysts like Munster (who predicts 235) will be vindicated, because the Mac's OS delivers real value to buyers.

By that I mean that its fundamental design is much more robust and secure than Windows, protecting users (for the most part) from losses and headaches due to malware, and from overhead due to malware-protection software. An article by John Markoff in the NYT a couple of weeks ago estimated the annual direct and indirect losses from such malware at $100 billion worldwide, and mentioned that the Mac has escaped so far. A large segment of the computer user population is wising up to that fact -- that's the strong foundation of Apple's franchise. It's not just cool-appeal or slickness. That's where conventional analysts like Huberty go wrong.

2008 Dec 19 08:42 AM

[Roger Knights:]

PS: I just clicked on the SA article "Rate of Consumer Spending Decline Stabilizes," which is located about a dozen items above this thread in the SA table of contents. It contains this quote, which bolsters my contention that Apple is keeping ahead of the bear, unlike the laggards:

"Consumer Electronics spending has registered a slight uptick as we reach the peak of the holiday season, with Amazon and Apple the clearest beneficiaries of an otherwise depressed retail environment."

Apple is maintaining its premium pricing, which indicates its confidence.

I suspect the reason AAPL's relative strength has been weak recently is that word that Jobs would not appear at the January MacWorld leaked out to traders. Indeed, I suspect that the health-factor has been responsible for half of AAPL's decline from its high. So I think there's little downside left if an announcement is made next month that SJ is stepping down from day-to-day activities. Maybe a ten-point hit. Lots less if the announcement is made in conjunction with a good earnings report.

2008 Dec 19 09:02 AM

[investor88:]

Zach has written a insightful article with good analysis. Short SPY is the right thing to do.

Glad that there is counter view to all the bulls out there. On balance I am fearful and on the negative side, like Zach.

2008 Dec 19 09:14 AM

[Zach Bass:]

The problem of Apple penetrating corporate America is not one of technology, because we all know that Apple builds technically superior products to the likes of Dell and Microsoft. The problem is the corporate buyer. Apple simply does not market or sell to the corporate buyer, who is far more concerned with expense than cost.

Apple markets to the individual. The Mac needs a Trojan horse to bring it into the enterprise, much like execs did with the iPhone, helped by Apple providing minimal enterprise support. Once you get past the buyers, then you need to get past the IT guys who don't want to support another platform.

I think if Apple concentrates more on small to medium sized businesses, it will have far more success, and it's a bigger market to boot.


On Dec 19 08:42 AM Roger Knights wrote:

> ... its fundamental design is much more robust and
> secure than Windows, protecting users (for the most part) from losses
> and headaches due to malware, and from overhead due to malware-protection
> software. An article by John Markoff in the NYT a couple of weeks
> ago estimated the annual direct and indirect losses from such malware
> at $100 billion worldwide, and mentioned that the Mac has escaped
> so far. A large segment of the computer user population is wising
> up to that fact -- that's the strong foundation of Apple's franchise.
> It's not just cool-appeal or slickness. That's where conventional
> analysts like Huberty go wrong.

2008 Dec 19 09:14 AM

[Roger Knights:]

PS: Important typo: AAPL is missing from the sub-headline, so it won't be properly indexed by SA, and some Apple-followers won't catch it.

2008 Dec 19 10:52 AM

[Roger Knights:]

ZB: "I think if Apple concentrates more on small to medium sized businesses, it will have far more success, and it's a bigger market to boot."

Agreed: This utter lack of focus on business sales is one of half-a-dozen dopey policies that Apple is following. If Apple changed them, it would improve its share and profits. Additional examples: License its OS to clone makers in the BRIC countries; lower its Mac prices 10%; come out with a netbook; come out with a mini-tower; acquire and bundle various popular utility programs with its OS (including perhaps a voucher for a virtualizer of the user's choice); etc.

But, viewed in another light, these negatives are positives, because they could be corrected fairly quickly if Apple's earnings softened and the board repeatedly nudged the CEO.

2008 Dec 19 11:02 AM

[Roger Knights:]

PS: BRIC clones would be for sale only in their country of origin--otherwise they would cannibalize Mac sales elsewhere.

2008 Dec 19 11:04 AM

[Carl Spackler:]

Zach,

You are right on in your assessment. This market is now overbought and overhyped. Everyone is calling for a rally - that is just when it retests the bottom!

2008 Dec 19 02:16 PM

[taojaxx:]

To think that the Fed is powerless is, to say the least, a bold statement. Credit markets are thawing: see JPM & BAC loosening covenants on $2Bn facility to Macy's (no less, consumer discretionary), money market rates nosediving, VIX plummeting. Have we seen the lows? not for me to say, but the crunch sure relaxes some of its grip.
You may remember that stock indices have lost about 50% of their value lately. It takes Armageddon to justify more, and even Armageddon after a while loses its momentum.

2008 Dec 19 08:34 PM

[Bruce Pile:]

The small caps (RUT) are in the same slowly rising wedge, but it is pressing at the top of the formation. The RUT has been leading the broader market, which would suggest a break to the upside. The market seems to be at a pivot point where it could do a swift bounce back from the big drop, maybe a fast 50% retracement, or it will fail at the 50, fall out of the wedge, and make new lows. I am keeping my powder mostly dry until I see which way it goes. There is probably some debt delevering dynamite left to fuel another debacle or two.

2008 Dec 19 11:44 PM

[Niner:]

Zach,

If you draw your top trend line from the Nov 14th high, you have an ascending traingle. Which is bullish!

All you chartists out there, which is it?

2008 Dec 20 08:41 PM