'So Goes Apple, So Goes The Market'? What Apple's Move Lower Means For The S&P 500

Benzinga's PreMarket Prep airs every morning from 8-9 a.m. ET. During that fast-paced, highly informative hour, traders and investors tune in to get the major news of the day, the catalysts behind those moves and the corresponding price action for the upcoming session.

During the rally from the pandemic low, there was one major concern from many investors: that the rally was narrow in breadth. In other words, how many different stocks were participating in a stealth move higher?

With respect to the S&P 500, even in its current state, only five stocks (combining the Alphabets) comprise nearly 20% of the entire index.

Those stocks are Apple Inc AAPL, Microsoft Corp. MSFT, Alphabet Inc GOOG (NASDAQ: GOOGL), Amazon.com, Inc. AMZN and Tesla Inc TSLA.

To further accentuate the heavy weighting to mega-cap technology, until recently both Metaverse Inc META and Nividia Corporation NVDA were members of the top 10 components. Those issues are now the 26th and 12th, respectively, largest index components. 

Rotation Is Not Enough: One important aspect of the PreMarket Prep show is the emphasis on rotation in the markets. For the most part, when money managers and investors sell out of a sector, they attempt to put the money back to work.

At the beginning of 2021, the rotation of overvalued growth stocks into mega-cap tech was highlighted — much of it fueled by the cheap money provided by the Federal Reserve.

When the Fed began its all-out assault on inflation in early 2022 by raising interest rates, the future value of the earnings of these bloated companies began to diminish.

Where Is The Money Going? Over the last month or so, accelerated by poor earnings, the exodus from mega-cap technology has flowed into value stocks (low price-to-earnings ratios).

The reason: these companies remain steady through all sorts of market conditions and take time to gain in price. A fundamental investor will attempt to purchase value stocks when they are “undervalued,” or when the market perceives their worth to be less than their intrinsic value.

This phenomenon is clearly evident in the issues remaining as the top S&P  components: Berkshire Hathaway Inc (NYSE: BRK-A) (NYSE: BRK-B), UnitedHealth Group Inc. UNH, and Johnson & Johnson (NYSE: JNJ).

TINA Trade Is Dead: During the Federal Reserve's year of easy monetary policy, the TINA (There Is No Alternative) trade was alive and well.

In other words, there was nowhere else for investors to put their money and get any kind of yield.

Even before this week's bump in interest rates, there was a variety of interest-bearing investments — CDs, Treasury bills and some corporate bonds — that were yielding 3.5%-5%, depending on the duration, and with respect to bond yields, the the quality of the company.
Of course, those yields do not keep up with the rate of inflation, but it is a whole lot better than watching your long-term portfolio get decimated.

Apple's Concerning Price Action: Although the index rallied off the higher jobs number, investors were alerted on Friday’s show that the rally may not be sustainable if the mega-cap technology stocks could not hold up.

As of 2:15 p.m. EST, three of the five big guns were in the red. While Tesla was leading the way to the downside, the price action in Apple is the most concerning.

This week, the issue has shed nearly 13% ($135) following the surprise rally off its fourth-quarter report, which was accompanied by tepid first-quarter guidance.

Even more concerning is that Apple has matched its October low and is attempting to rebound. This comes after the issue was higher by nearly $4 off the opening and is now $4 in the red.

If one goes by the premise of "so goes Apple, so goes the market," the index futures, which were trading at the 3,730 area, just may have an upcoming date with their October low of 3,502.

On the other hand, could the index be at the onset of a major rotation into value stocks — one that will persist as long as the 10-year dominance of mega-cap technology?

The discussion on the importance of mega-cap technology stocks holding up from Friday’s show can be found here:

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