foxex: Apple Falls and So Does the Tree

Chart Advisor | INVESTOPEDIA

Focus on the Price

By John Jagerson, CFA, CMT

Thursday, January 03, 2019

1. Flash crashes and volatility

2. S&P 500 heatmap bright red with islands of green

3. Apple's (AAPL) far-reaching influence

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Major Moves

The past 24 hours have seen a dizzying array of volatile moves in a variety of financial markets. Stocks have dropped, bonds have risen and currencies have flash crashed.

The stock market has been retreating from its recent highs in the aftermath of Apple's (AAPL) surprise warning – the first in more than 15 years – that it is not going to meet its revenue projections for last quarter. Management had expected the company to generate between $89 and $93 billion in sales for the quarter, but it now expects to only report $84 billion in sales. Apparently, sales in China are weak and could be getting worse.

Seeing the third largest company in the S&P 500 lose traction in its most important potential growth market deflated trader sentiment on Wall Street. Each of the three major stock indexes, the S&P 500, the Dow Jones Industrial Average and the Nasdaq lost more than 2% on the day.

Bond prices are soaring, and bond yields are plunging, as traders continue to run for safety amid the uncertainty that is bubbling up all around us. The 10-year Treasury Yield (TNX) slammed through 2.6% without batting an eye before finally closing at 2.55%, its lowest level since January 17, 2018.

Even the currency market added to the commotion today with the U.S. dollar (USD) flash crashing against the Japanese yen (JPY). It had already been a bearish two weeks for the USD/JPY currency pair before today, but the drop that was triggered last night after AAPL made its announcement was equal in magnitude to the previous bearish move.

This flash crash has many investors wondering if currency traders are going to start feeling pressure to cover their short positions in their JPY carry trades – a strategy where traders will borrow money denominated in JPY and use the proceeds to buy U.S.-based stocks. If these carry traders start to unwind their positions, they may be force to sell their stock holdings, which could put more downside pressure on the S&P 500.

S&P 500

While Apple's (AAPL) decline certainly influenced the bearish move in the S&P 500, it wasn't all doom and gloom for the index.

In one of the biggest acquisitions of the past 12 months, Bristol-Myers Squibb (BMY) announced it will be buying Celgene (CELG) for a whopping $74 billion. The combined company will now own nine products – including Revlimid, CELG's multiple myeloma drug, and Opdivo, BMY's lung-cancer treatment – that generate upwards of $1 billion each per year.

This announcement sent traders rushing into Biotech stocks wondering who the next acquisition target might be, creating a bright green block on the S&P 500 heatmap.

Also, with Treasury yields dropping like a stone, dividend yields from Real Estate Investment Trusts (REITS) and Utilities stocks are looking increasingly attractive.

While traders were lightening their exposure to Technology and Financial stocks today, they were simultaneously moving a larger portion of their portfolios into REITS and Utilities. This rotation generated two more islands of green amid a sea of red on the S&P 500 heatmap today.

Read more:

Flash Crash

Currency Carry Trade
What are Risks of Real Estate Investment Trusts (REITs)?

Source: finviz.com

Risk Indicators

Apple (AAPL), which officially dropped to its lowest level since April 21, 2017, today, is an important barometer for Wall Street.

AAPL is not only the third largest company in the S&P 500 – a market-cap weighted index – but also a bellwether for global consumer demand. When consumers are confident, they are much more willing to shell out $1K+ for an iPhone. Seeing AAPL rolling back sales expectations tells us consumers aren't as confident as they once were.

The fact that the majority of AAPL's woes stem from China also tells us the trade war between the United States and China is starting to take a toll on consumer spending. Analysts have worried about this for the past year, and now those fears are being confirmed.

With AAPL breaking through two important long-term support levels during the past few weeks and currently sitting at another one, it wouldn't take much to see the stock drop all the way back down to they bullish gap that kick started the latest long-term bullish run in early-2017.

Bellwether Stock

Why Consumer Confidence Matters

Bottom line: Apple Could Rot the Entire Barrel for Earnings

With earnings season starting in earnest next week, traders are all now scrambling to adjust their expectations based on the bitter news AAPL delivered last night. Watch for price multiples to continue to contract until someone, anyone can surprise to the upside.