If Apple falls below $419, market will fall with it
The tech stock is very large and very liquid, and it's a leader.
Apple (AAPL) is the most valuable and influential stock in global stock markets, based on its market capitalization and its trading volume.
Its recent low was $419, which represents a clear technical line in the sand that stretches all the way back to two ascending peaks in late 2011.
A violation of the $419 level suggests that Apple may move down to approximately $350 before it finds any substantial support; $400 may provide a first level of psychological support.
Until now, Apple has been falling because of factors that are specific to the stock. However, I believe most of these idiosyncratic and non-diversifiable factors have already largely been priced into Apple's stock price, based on the current state of information.
Therefore, at this point, AAPL becomes a leading tell for the entire stock market. It is important to understand that mutual funds, ETFs that and index futures managers that need to liquidate positions will first liquidate the largest and most liquid holdings in order to reduce equity exposure. This means, that in a general market decline, AAPL's stock will tend to be a leading indicator that will act with a high beta to a fast-moving market.
Based on highly negative developments in Europe and Asia in the past few weeks, as well as in global commodities markets, I believe that the US stock market is ripe for a significant correction that would take the S&P 500 ($INX) down to the 1475-1500 region. This implies a correction of about 5%-7% in major index ETFs such as SPDR S&P 500 (SPY) and SPDR Dow Jones Industrial Average (DIA).
Even greater downside is likely technology and small-cap focused exchange-traded funds (ETFs) such as PowerShares QQQ Trust (QQQ) and iShares S&P 600 Small Cap Index Fund (IJR). The downside target for Apple in this correction scenario would probably be in the $385-$390 range.
All things being equal, I would consider such a decline in the broader market to constitute a garden-variety pullback within an ongoing cyclical bull market. Damage beyond that would probably have to be triggered by a major exogenous shock such as extremely bad news out of Europe, China, the Korean peninsula or the Middle East.
At the time of publication the author had no position in any of the stocks mentioned.
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