Dow 14,200 – 2007 vs. Today

One person’s loss seems to be someone else’s gain. The fake QE bull market has created new realities. Whether good or bad, they seem unjust for many, with the exception of 1,426 lucky ones.

The Dow Jones just got within 50 points of its 2007 all-time highs. Looking at the chart below it appears as if all the agony caused by the 2008 financial crisis has been erased.

But guess what? A chart can be deceptive. I’m not the first and probably won’t be the last to point out the painful differences between Dow 14,000 in 2007 and Dow 14,000 in 2013.

On open-eyed trip down memory lane will highlight many perverse market realities not captured by any single bar or candle chart. What are they and who profits from them?

The two most recent Dow 14,000+ readings happened in February 2013 and October 2007. Let’s compare the two.

The table above speaks for itself and tells the story of millions of Americans still left without (adequate) jobs, out of their homes, bankrupt, and/or on food stamps.

The chart below ads a few more brush strokes to that picture as it plots the S&P 500 against unemployment (the rosy U-6 number), food stamp recipients and the Fed’s balance sheet.

But there’s another story to tell. The story of the “1%-ers” or the “1% of 1%-ers.”

According to Forbes, the year 2012 saw 200 new billionaires, a 16% increase over last year. The total number of billionaires is now a record 1,426 worldwide.

As a group, billionaires’ net worth soared to 5.4 trillion, 17% year over year increase. The average net worth of a billionaire is $3.8 billion according to Forbes. It’s tough to find historical data on the world’s billionaires, but in 2004 there were 691 billionaires collectively worth $2.2 trillion.

Although the future of the fake QE bull market is uncertain, we already know the winners and losers of the great fake recovery: The ‘expensive champagne elite’ (winners) and ‘cheap beer economy class’ (losers).

There are now more billionaires and more welfare recipients than ever before. Whether QE and worldwide quantitative easing is to blame for this we don’t know.

Unless they find a way to profit and not get hurt by QE, the middle class will become the next ‘mammal’ on the list of endangered species.

Will a ‘Bad Apple’ Spoil the Rest of the Market?

AAPL is down 35% while the Nasdaq is moving higher and the S&P 500 is trading at new recovery highs. Is this bullish for the broad market or will ‘a bad Apple spoil the whole bunch?’

An apple a day keeps the doctor away or so the saying goes. Up until recently Apple (as in AAPL) also kept any bear market away.

For much of 2009 – 2012 the stock market followed this simple formula:

rising AAPL = rising stocks.

Theoretically falling AAPL should = falling stocks, but that hasn’t been the case. Why? And is that bullish or bearish for the broad market going forward?

AAPL – From Leader to Laggard

The chart below shows the percentage gains of AAPL and the Nasdaq Composite since 2012.

Until mid-November AAPL and the Nasdaq traded directionally in sync. Rising AAPL = Rising Nasdaq and vice versa. That changed by late November, when Apple started heading south and the Nasdaq north.

How can this be? Other companies started to pick up the slack and fill the void Apple left behind. Google for example started to rally in November. So did Microsoft, Oracle, Amazon, Cisco, Qualcomm, and others.

The second chart illustrates GOOG’s recent counter-AAPL performance. As shares of other technology sector stocks rallied, their market cap and weighting in the Nasdaq increased.

As AAPL tumbled, its weighting (and importance) in the Nasdaq and S&P 500 decreased. Not only did Apple shares tumble 35%, its weighting in the Nasdaq did the same. It fell from over 20% to 13%.

At its best, AAPL accounted for nearly 5% of the SPDR S&P 500 ETF (SPY) compared to 3.62% today.

Apple’s relevance to the overall U.S. market diminished as Apple shares spiraled lower.

Technical Apple Analysis

The chart below is an updated version of the log chart I first introduced in an August 24 video analysis about Apple.

My comment at the time when AAPL traded at 675 was: “I would like to see a more deliberate test of the upper channel line, but being out of AAPL seems like a prudent move.”

A later issue of the Profit Radar Report recommended to go short with any push above 700.

Getting back to the log chart of Apple; the black parallel trend channel provided a target for the high as well as an initial target for the first leg down. After back testing the lower parallel channel line once more (kiss good bye), AAPL embarked on the next leg down.

On Friday, AAPL closed below support, now red resistance. RSI has not yet reached a new low to confirm the price low. This could be the setup for a bullish divergence, but I would wait for more confirmation in the form of a close back above the red line.

Use that trend line as basis for your stop-loss, because I am following a new parallel channel and a break below this channel support could trigger a bearish technical break down pattern with a significantly lower price target.

Interesting Apple developments and possible profit opportunities will be covered by the Profit Radar Report.

Will Small Caps Lead the Market to All-time Highs?

Market timers often watch small caps for clues about possible trend reversals, but thus far the Russell 2000 Small Cap Index is going strong. Here’s a closer look at seasonality and support/resistance levels for the Russell 2000.

It’s said that major market tops are often preceded by weakness in small cap stocks. This premise makes sense, as small cap stocks are most sensitive to the ebb and flow of liquidity. As a liquidity gauge, small cap indexes like the Russell 2000 could be the canary in the mine.

The truth is in the pudding. Does this theory hold up against the facts? The chart below plots the S&P 500 Index against the Russell 2000. I guess the key point is how you define a “major” market top.

Small cap weakness foreshadowed the 2007 top, but wasn’t obvious at the 2010, 2011, and 2012 highs (at least not on the weekly chart).

What about today? Small caps are going strong and the canary is chirping and frolicking.

The second chart provides a closer look at the Russell 2000 (corresponding ETF: iShares Russell 2000 ETF – IWM).

The Russell 2000 climbed back above the green trend line originating at the October 2011 low.

Recent prior peaks supply various resistance levels (red lines) and today’s decline drove prices below the green November 15 support line (an early warning signal), but starting in mid-December small caps tend to outperform large caps. January is one of the strongest months for small cap stocks.

Historical seasonal patterns suggest that more strength lies ahead for small caps. Technicals support this view. This may drive small caps to new all-time highs (less than 4% away), but I doubt it will be enough to push the Dow and S&P to all-time highs. A break below technical support at 836 (green trend line support) would warn that this year is different.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.