Something’s Amiss in Stock-Market Rally

Barron’s

Though stocks gained late Wednesday on Fed news, it didn’t respond well earlier to Apple’s stellar quarter. That’s a troubling technical sign.

Once again, the Federal Reserve came to the market’s rescue, pledging on Wednesday to hold interest rates low through late 2014. This was good news for the bulls as stocks were a bit woozy early in the trading day despite Apple’s (ticker: AAPL) blowout first-quarter earnings report released late Tuesday. The good news is that stocks tend to move higher when they perceive support from the Fed. The bad news is that other than the visible gains that took place midday Wednesday, the internals of the market are not as good as people think.

Investors should remain skeptical.

After the bell Tuesday, Apple’s earnings sent its shares soaring in after-market trading and through Wednesday’s trading. Unfortunately for the technology sector and the stock market in general, Apple’s coattails were small.

The rest of the market did not show much strength until the Fed’s announcement.

The lack of participation by most of the market to positive technical news — Apple’s great news — is troubling. Even though major market indexes did turn green by midday Wednesday, when market generals lead and their soldiers do not follow, something is amiss.

Apple is in a class of its own as it has outperformed the market for literally a decade and longer. While it is not a member of the Dow Jones Industrial Average, it has a huge influence in other indexes. Unfortunately, that influence has so far not been enough to push them through technical resistance on their respective charts.

For example, the Select Sector SPDR-Technology (XLK), an exchange-traded fund containing a basket of technology stocks, is now trading near its 2011 peak (see Chart 1). It jumped up in Tuesday’s after-hours trading, thanks in part to Apple’s 15% weighting in the index, However, it quickly fell back as Wednesday’s trading began.

Chart 1

SELECT SECTOR SPDR TECHNOLOGY ETF

[GT1-0125]

One look beneath the hood of the index shows that just before the Fed’s announcement, more stocks were in the red than were in the green by a two to one margin. And if we narrow that to just the top 10 stocks in the index by market capitalization, the ratio was even more skewed toward decliners.

Even after the Fed, the advancers and decliners were roughly even, so we can still say that Apple, despite its size and weighting, could not lead the index on its own.

To be sure, the technology ETF is still officially in a rising trend since its October low so this is far from a forecast for immediate declines. Rather, it illustrates a problem in the market that may be hidden from view.

Apple is also an influential member of the Standard & Poor’s 500 index. Using the SPDR S&P 500 ETF Trust (SPY), the index spent most of Wednesday morning trading in the red until the Fed’s announcement (see Chart 2).

Chart 2

SPDR S&P 500 TRUST ETF

[GT2-0125]

Volume has been problematic for the S&P 500 ETF and the market as a whole (see Getting Technical, « Don’t Chase This Rally, » Jan. 19). Trading activity Wednesday morning was as light as it has been for weeks and there was little increase post-Fed. In fact, volume has been contracting for weeks and that suggests there is not much fuel available to keep the current rising trend going for long.

For now, the Fed has saved the day as the market was showing real signs of technical wear and tear. Adding to its problems, other leaders, such as McDonald’s (MCD) and MasterCard (MA), have started to struggle.

Perhaps the market trend can push a bit higher on the perception that continued low interest rates are good.

The reaction of gold Wednesday, as it scored a technical breakout to the upside, may change that view.

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