Bad Apple

 | Jan 14, 2013 | 8:40 AM EST  | Comments
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What we're doing here will send a giant ripple through the universe. --Steve Jobs

The market was set for a quiet start to a busy week of economic and earnings reports but news from Apple (AAPL) has cast a pall this morning. What is stunning about the AAPL news isn't that it cut orders for components, but the magnitude of the cut. According to the Wall Street Journal, Apple cut orders for iPhone 5 screens by about half. It is hard to imagine that business falling to that degree but, obviously, Samsung and Google (GOOG) are putting up a battle in the smartphone market.

The AAPL chart clear shows the market has correctly anticipated poor news for a while. The issue now is to what degree this has been priced in. Early indications are that many fear that it has not been and the stock is sitting right at key support around $500. If there isn't a good bounce soon, the stock is in a very ugly technical position and really has little support down to $450.

Apple is a good example of something I wrote about in my book, Invest Like a Shark. All stocks have a limited period of time in which they are standout performers. The lifespan of extremely strong momentum is short. For some stocks, it can last a decade and for others it can be just a few months. Ultimately, in all cases, the stock that seemed like it could do no wrong will eventually become run-of-the-mill. Microsoft (MSFT) is probably one of the best examples in the last 25 years.

In retrospect, it is interesting to consider that AAPL topped out almost exactly when the fervor over it was the strongest. We had analysts setting $1000 target and the media writing about how it has the biggest market cap of any stock in history and could go even higher. Just when it seemed it could never do wrong, a very ugly downtrend began and now we have this very sobering news.

AAPL is going to be a problem for the Nasdaq and there will be sympathy pains in a number of related names, but the broader market is still in good shape. There's a good technical setup with decent consolidation of recent gains and expectations for earnings season seem to be low. In fact, the poor AAPL news may lower expectations even more, and that would be a positive.

The biggest problem I have with the market right now is that the recent run has diminished the supply of good setups. We could use more base building and pullbacks to set things up, but the good news is that earnings season always creates a crop of new stocks that are outperforming, which is good for stock pickers.

 We'll see if we have some bad-news buyers looking to jump in AAPL, but the problem is that there still isn't much clarity about the extent of its problems. If orders for iPhones are really being cut in half, the pressure isn't going to disappear quickly.

 Put on your trading helmet and adjust your goggles. It is going to be a busy week with much news.

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