Trader Talk

Does Apple's weakness mean the market is in trouble?

A pedestrian passes an Apple store in San Francisco.
Robert Galbraith | Reuters

You knew this was going to happen. The world's most well-known tech name—Apple, is in a short-term downtrend. No one knows if it will be the start of a long-term downtrend.

But someone writes a story, "How a deeper dive by Apple could crush this market," implying that as goes Apple, so goes the stock market, and it gets a lot of attention.

Apple is an important stock because, well, because it gets a lot of attention.

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But it is not a bell weather of the overall market.

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Anyone looking at the stock market can see this.

For example, Apple shot up in late January 2012, going from roughly $64 to $100 in mid-September, but the S&P 500 barely moved.

It then went straight down for six months, going from $100 in mid-September 2012 to $56 in late June 2013, a drop of 40 percent, a period when the S&P 500 moved UP more than 10 percent.

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Apple and the S&P do NOT move in tandem.

Even when you look at a tech index like the Nasdaq 100—where it has become roughly 15 percent of that index, the relationship has directionally correct. Both are up in the last couple years, but there were long periods where there was no correlation.

Apple moved down roughly 12 percent for several months in late 2013 and into mid-2014, a large drop, but the Nasdaq 100 moved down less than 3 percent.

In a two-week period from late April to early May 2014, Apple shot up 13 percent. The Nasdaq 100 didn't budge.

Sometimes, there is a better correlation. Apple's last leg up—when it moved roughly 30 percent in one month between mid-January and mid-February—saw the Nasdaq 100 move about 8 percent. That's pretty significant.

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But "as goes Apple, so goes the stock market?" I don't think so. There's plenty of other places—like banks and biotech and select internet names—where's there's just as much money.

Let's address another issue—Apple dropping below its 200-day moving average as a cause of the current weakness.

Do technicals matter? The short answer is yes, but not all technicals are the same. Some matter more than others.

Take Apple and its 200-day moving average. The Street stood up and took notice when Apple broke below $120 a little after 1pm ET yesterday. The 200-day moving average was roughly $120.86.

Volume immediately picked up, and the stock moved to new lows for the day, a trend continuing today.

Clearly, in this case, technicals mattered. Apple had not broke below it's 200-day moving average since late 2013, and there were clearly momentum investors who had sell stops pegged to the 200-day moving average.

Technical analysis is a strange beast. If enough investors believe that it works and act upon the information, than it does work. If enough people who own Apple believe that the 200-day moving average is some line that will make them sell if it drops below that, and they sell, than technical analysis, by definition, works.

But there are precious few who act exclusively on technical analysis. Most traders today employ a witches' brew of technical and fundamental analysis when deciding when to buy and sell.

I call these people "closet technicians." Even fundamental guys—the strategists at the big brokerage firms—will say, "I like this company on the fundamentals, and by the way the chart looks great."

And that's the main point about Apple: the greater reason the stock has been weak recently is that Apple doesn't offer a great story right now.

The iPhone 6 is already passed its peak as a story. The iWatch is an important but niche product. I'm an Apple fanatic—I own a Mac, an iPad, and an iPhone, and so does my wife—but like many Apple users I have not seen a compelling reason to buy an Apple Watch.

Throw in the slowdown in China...where Apple gets about 16 percent of its revenues, but is expected to be much higher in the coming years—and you have a number of reasons why the stock would be weaker.