Weekly Update

July 29, 2016 Update

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Putting Apple’s move in context

This week, for the first time in quite a while, former market darling Apple popped higher following a surprisingly strong earnings report. The stock gapped higher delivering another upward push to a powerful Nasdaq Composite rally in progress for five weeks now. Despite the one-day enthusiasm for the stock, more work is needed to reverse Apple’s year-plus decline as shown here:

Chart 1: Apple’s post-earnings pop doesn’t break the stock’s downtrend

 Apple's post-earnings pop doesn't break the stock's downtrend

The above chart chronicles the tremendous rally in Apple stock coming out of the 2008 financial crisis bear market. Apple launched a 9-fold gain over a three-year period from 2009 to 2012. After pulling back for a year, the stock blasted higher again before peaking in early 2015. Since then, investor concerns about the slowdown in iPhone sales growth and disappointment over the prospects for new products produced a downtrend. Expectations for the stock have plunged to a point where beating those expectations is becoming easier. And so it was with this week’s report.

Chart 2: The topping pattern in Apple stock

The topping pattern in Apple stock

In looking at the peak of Apple’s stock in 2015 and subsequent roll over in price, we see a very good example of a topping pattern. This pattern shows up in market indexes and stocks as they run out of power from buyers. We’ve boxed in the sort of three-stage process Apple’s stock went through as buyers tried futilely to reverse an increasingly stubborn downtrend. The first box (red) shows a stalemate between buyers and sellers with the stock trading in a range for an extended period of time after a strong rally. Oftentimes, this sideways trading is nothing more than a digestion of the prior rally with every dip being bought but every attempt to push upward finding sellers to halt the rally effort. So it was throughout the first half of 2015. The stock gave up the support at 120 when the broad market faltered in August 2015. But the rally attempt in the brown box was short-lived and failed to retake the 120 level. The market decline that kicked off 2016 again pushed through support as shown by the yellow bar. An even shorter rally effort failed dropping the stock back below 100. That yellow bar has acted as resistance ever since with this week’s post-earnings pop (circled) challenging the upper-boundary of that resistance.

We see the topping pattern as a long process of bulls failing to rally the troops to reverse the increasingly powerful downtrend. Each rally effort is shorter in time as bears gain the upper hand. Now, it appears that the broad stock market has gained strength while Apple has beaten reduced earnings expectations. That combination might put enough wind in the sails of the stock to end the downtrend and get this heavily-weighted stock new life. If so, the market and our focus Nasdaq 100 index will have much more room on the upside.

A rainbow of lies

Investing based on your political views is a recipe for disaster. We much prefer our unemotional Models. Chart 3 below we thought was interesting for a couple of reasons:

  1. it shows an interesting use of “big data” where computers crunch gazillions of inputs into a nice looking little chart,
  2. we liked the rainbow colors,
  3. we have no comment on the output – draw your own conclusions.

The data comes from Politifact, an independent fact-checking service. The chart was generated and posted at an excellent source of how to present data: https://datavizblog.com/

Chart 3: Politifact combs through the veracity of our political landscape

Politifact combs through the veracity of our political landscape

Market Update

Four weeks and counting for this post-Brexit stock market rally. Monday saw investors take a breather with pressure on oil prices a negative factor. Still, stocks tilted lower only -0.3%. Tuesday brought a flurry of earnings reports with strength in the industrial sector from Caterpillar and United Technologies being somewhat subdued by weakness in McDonalds and biotech heavyweight Gilead. The indexes closed the session flat with many investors staying on the sidelines ahead of mid-week reports from U.S. and Japan central banks. The U.S. Fed’s statement struck a tone suggesting a greater possibility of interest rate hikes this year now that the markets have recovered from their post-Brexit swoon.
Stocks and bonds took the announcement in stride to end little change. The Nasdaq rose, however, on a surprisingly positive report from Apple. The stocks jumped over +5% on the day, a marked contrast to the weakness displayed by another consumer powerhouse, Coca-Cola which saw shares reduced by -3%. Investors stayed largely on the sidelines Thursday ahead of overnight earnings reports from Amazon and Alphabet as well as a statement on monetary policy from the Bank of Japan. The S&P 500 closed up +0.2% while the Nasdaq Composite extended its slight outperformance on a good report from Facebook. Amazon and Alphabet both saw their stocks lifted by their earnings releases while ExxonMobil, Goldman Sachs, and Travelers all slid backward on theirs. The first print of the 2nd quarter U.S. GDP was softer than expected which added to pressure on the U.S. dollar, which was set down by a lack of stimulus coming out of the Bank of Japan’s meeting. Less stimulus from the Bank of Japan leads to a stronger Yen thus a weaker U.S. dollar. Stocks remained in flat trading mode with a +0.2% move.

Warm wishes and until next week.