The stock market is always looking for leadership. If it can't
find it in Washington, it will look elsewhere. If it can't find it
elsewhere, stocks may just tumble.
If you don't have the hardcore optimism needed to rely on
Washington for leadership, you are probably wondering where the
next stock market alpha male will come from.
The Obvious Choice
Yes, the obvious choice is the second biggest company in the
world (based on market capitalization) -
(NasdaqGS: AAPL). Apple has been driving the Nasdaq (Nasdaq: ^IXIC)
and, by extension, the stock market.
How big of a driving force is AAPL? AAPL accounts for 14% of the
Nasdaq-100 and Technology Select Sector SPDRs (NYSEArca: XLK). From
June 16 - July 26 the Nasdaq-100 gained 10.9%. Over the same period
of time AAPL rallied as much as 27%. AAPL single handedly lifted
the Nasdaq-100 by 2%.
Over the last few weeks however, AAPL has lost its magical
touch. The broader non-tech focused Dow Jones (DJI: ^DJI) and
S&P 500 (SNP: ^GSPC) saw a nasty correction, while AAPL is less
than 4% away from its all-time high.
A closer look at the Nasdaq-100 shows that APPL's strength is
masking weaknesses in other tech stocks. The average component
stock of the Nasdaq-100 is down more than 14% from its 52-week
high, while the Nasdaq-100 is off by 'only' 6%.
It appears that a few strong holds are able to buoy the
Nasdaq-100. The strong holds include Apple, Microsoft, Google,
Intel, and Amazon. These five names account for a third of the
If the big money starts leaving this strong five-some, it's time
to head for the exits (this may have started already).
The Drag on the S&P
The biggest drag on the S&P 500 has been the financial
sector. While the Russell 2000 (NYSEArca: IWM), Nasdaq -100, Nasdaq
Composite, MidCaps (NYSEArca: MDY) and various sectors like
consumer discretionary (NYSEArca: XLY) and industrials (NYSEArca:
XLI) were able to rally to new all-time highs, financials lagged
The Financial Sector SPDR (NYSEArca: XLF) has failed to provide
any kind of leadership and is now trading below an important
support shelf at 14.60. In the past, this support has caused a
spike in financials and broad stock indexes, at the very least.
The ETF Profit Strategy Newsletter referred to this support
shelf twice before. On June 23 and July 17, the Newsletter used XLF
as a proxy for the broader S&P and noted that XLF found
support, which should translate into a rally for stocks. The fact
that financials sliced below support is less than confidence
inspiring. For stocks to rally, financials need to participate.
Do or Die Time
But before we talk about the potential for higher prices, we
need to acknowledge the down side risk. The S&P has sliced
below structurally important support. The S&P trades now
slightly below the March and June low. What does that mean?
On March 16 the S&P bottomed at 1,249. On February 18, with
the S&P at 1,344, the ETF Profit Strategy Newsletter expected a
correction and commented that: 'The scope of any correction might
set the tone for much of 2011. If stocks don't fall below 1,229, we
expect new recovery highs.' The March correction was followed by
On June 16 the S&P bottomed at 1,258. Sentiment had turned
extremely bearish, which pointed towards a potential bottom. The
sentiment message was confirmed by technicals.
The June 15 ETF Profit Strategy update stated: 'The 200-day SMA
at 1,257 is sandwiched between the 1,255 Fibonacci projection level
dating back to 2002 and this week's s1 at 1,259. Wednesday's low
was at 1,261.9. If this low is not enough, there is a strong
cluster of support at 1,259 - 1,245. A drop into the 1,259 - 1,245
range would prompt us to close out short positions and leg into
long positions' (long positions were closed out at 1,345).
The S&P is now below where the March and June declines
stopped. Will it find
It may, but the odds for a bottom are less favorable than they
were in March and June. In March the S&P didn't even get close
to the 200-day simple moving average (
). In June the S&P bounced off the 200-day SMA. A few days ago
the S&P broke below the 200-day SMA.
The same is true regarding two rising trend lines originating
from the March 2009 lows. Lower prices from here may validate a
head and shoulders top and point towards even lower prices ahead.
The chart below plots the S&P 500 against various
support/resistance levels outlined by the ETF Profit Strategy
on't Trust the News
Yesterday's sell off, following the passed and signed debt limit
bill, is just another example that basing investment decisions on
news events is treacherous. Not knowing the standoffs outcome, the
ETF Profit Strategy Newsletter made a simple recommendation on
Thursday, July 28:
'A break below the 200-day SMA and the trend line may trigger
panic selling. One way to avoid missing out on a potentially big
opportunity is to use the 200-day SMA at 1,284 as delineation
between bullish and bearish bets - buy as long as the 200-day SMA
serves as support, sell if it becomes resistance. If the S&P
seesaws, repeat the process (see June 2011 Newsletter, page 10 for
details on how to deal with a potential seesaw).'
It sounds deceptively simple, but selling against resistance and
buying against support has kept subscribers on the right side of
the market nearly every step of the way leading up to, and since,
the May 2 high at S&P 1,370 (this article includes a small
track record of past recommendation:
3 Reasons Why This Summer Could Get Ugly
Profit Strategy Newsletter
boils down complex technical analysis to important
support/resistance levels. How do you trade a market that's just
broken important support? Yesterday's special update provides a
short, mid and long-term perspective along with the best strategy
for right now.