SPY: The Apple Effect

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About: SPDR S&P 500 Trust ETF (SPY), Includes: AAPL, AMZN, FB
by: Income Generator

Summary

Stock markets continue to trade under a dark cloud of selling pressure, and these trends have generated extended declines in the SPDR S&P 500 Trust ETF.

The market seems to be punishing earnings results that are only marginally negative, while largely ignoring evidence of fundamental earnings strength in the fund’s core holdings.

Investors are looking for a beacon of hope in an otherwise gloomy landscape, but the deteriorating chart activity does not match the general stability which has posted in quarterly earnings.

Declines in Apple have weighed disproportionately on the ETF, and these trends have been matched by other important tech components found within the fund.

Since these moves have occurred in a somewhat irrational fashion, a bullish turnaround in SPY looks likely going forward.

Stock markets continue to trade under intense selling pressure, and these trends have generated extended declines in the SPDR S&P 500 Trust ETF (SPY). Unfortunately, the market seems to be punishing earnings results that are only marginally negative. At the same time, potentially bullish investors seem to be ignoring evidence of fundamental earnings strength in the core holdings of the ETF.

Those with long positions in SPY are looking for a beacon of hope in an otherwise gloomy landscape. But this deteriorating chart activity does not match the general stability which has become evident this earnings season. Since these moves have occurred in a somewhat irrational fashion, a bullish turnaround in SPY looks likely going forward.

(Source: Author/Trading View)

Declines in Apple, Inc. (AAPL) have weighed disproportionately on SPY, and these trends have been matched by other important tech components found within the fund. For the fiscal fourth quarter, the company generated earnings of $2.91 per share, which was a massive beat on the consensus expectations of $2.78 per share. Revenues came in at $62.9 billion for the period (beating estimates of $61.57 billion).

On the downside, Apple showed weaker iPhone sales (46.89 million) relative to the consensus estimates (47.5 million). But the average sale price for each iPhone sold came in very strongly (at $793). All combined, the company’s impressive margins helped offset the effect of its weaker sales numbers for the period. But the market’s initial reaction failed to reflect this strength. Those disparities have become glaring, and the stock has fallen by more than 12% since it reached its record highs (at $233.47) on October 3rd.

(Source: Author/Trading View)

Within the broader market, the performance of Apple stock has a significant impact on sentiment, and it is undeniable the recent declines in share prices seem to be confirming the bearish outlook. APPL makes up the largest percentage of the total holdings in SPY, representing 4.38% of the fund. So, until we see a turnaround rally in AAPL shares, the argument can be made that it may be difficult for SPY to recover its prior losses.

Fortunately, the fundamental outlook remains supportive of this type of scenario. In its most recent earnings report, Apple surpassed expectations on both the top and bottom lines. Investors seem to have disregarded these positives, but the company has now shown revenue growth for seven straight quarters. This rate of growth accelerated during the fiscal fourth quarter, as revenues surged by 20% on an annualized basis (a performance which marks five straight quarters of double-digit revenue gains).

Growth rates in Apple’s earnings per share were even more impressive (at 41%). This type of performance is something of a rarity for an “aging” tech company, and it follows EPS growth of 40% during the fiscal third quarter. Share buybacks were helpful in guiding this trend, but Apple’s expansion in its gross margins has also been incredibly supportive. The company’s latest quarterly report showed that its gross profit margins grew to a massive 38.3%. This represents a sizable improvement from the 37.9% gross profit margin which was reported during the same period last year.

Overall, it is difficult to see what is causing all of the concern with respect to Apple share prices. In reality, it looks as though the bearish trends seen more broadly in the market are working as the dominant factor in generating these recent declines.

(Source: Author/Trading View)

Similar trends have become visible in Facebook (FB), which makes up 1.59% of the fund. For the third quarter, Facebook posted earnings of $1.76 per share, which was far above the market expectations of $1.47 per share. The company’s revenue figure was slightly below expectations of $13.78 billion (at $13.73 billion).

Other key metrics for Facebook include daily active users (1.49 billion), monthly active users (2.27 billion), and average revenue per user ($6.09 per 2.29 billion). These metrics were roughly in line with the consensus estimates for the period, but Facebook did signal an expectation of rising expenses heading into 2019. Despite the relative stability of this performances, the stock has fallen below a key psychological level at $150 per share in a massive decline of 36.41% from its all-time highs on July 25th.

(Source: Author/Trading View)

Additional bearishness directed at SPY has come from Amazon (AMZN), which makes up 2.85% of the fund. For the third quarter, the company generated earnings of $5.75 per share (which was nearly double the earnings of $3.14 per share expected by analysts).

Total revenues were slightly lower than the consensus expectations (at $56.6 billion) but still higher by 29% on an annualized basis. Sales figures in North America rose by 35% from the same period last year (at $34.4 billion), and international sales posted gains of 13% (at $15.5 billion). Revenue generated by Amazon’s important Web Services segment posted roughly in line with estimates (at $6.68 billion), which marks an annualized gain of 46%.

The company’s net income figure came in at $2.8 billion. This marks the fourth consecutive quarter with profits of over $1 billion, and it is a 10-fold increase relative to the figure posted during the same period last year. This performance was well above the market’s expectation of $2.1 billion and these gains were driven largely by third-party sales services, advertising, and revenue growth in Amazon’s Web Services. These are all high-margin segments, and these figures indicate strong potential for strength going forward.

Amazon's guidance shows expectations for $66.5-72.5 billion in revenues for the critical fourth-quarter period. These figures are weaker than Wall Street’s prior estimates. But these lower expectations for the holiday season give the company a better margin of error in beating the analyst consensus as we move into the next reporting period.

(Source: Author/Trading View)

When we put all of this together, it is difficult to see what is causing all of the concern with respect to valuations in SPY. Overall, it looks as though bearish trends seen more broadly in the market are working as the dominant factor in generating these recent declines.

Blue-chip tech companies like Apple, Facebook, and Amazon have the tendency to influence market sentiment in strong ways. But this could turn out to be a positive for SPY bulls once this downside momentum starts to run out of steam. Investors are looking for a beacon of hope in an otherwise gloomy landscape, and deteriorating chart activity in SPY does not match the general stability which has posted in quarterly earnings results this season. Strong earnings were posted by each of these companies during the most recent reporting period, and since these moves have occurred in a largely irrational fashion, a bullish turnaround in SPY looks likely going forward.

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Disclosure: I am/we are long AAPL, AMZN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.