By: Chris Rowe — May 17, 2016
Why Argue About Apple?
My Current U.S. Stock Market Stance: Short-term overbought. The general stock market is consolidating as institutions decide which way to cut. Seasonality suggests further downside in the S&P 500 (4% or more). Focusing on the strongest sectors is extremely important at this juncture.
Why Argue About Apple?
Until the day it was stolen, in 1911, the beauty of it was enjoyed by few.
But that didn't make it any less beautiful.
Relative strength investing is one style, enjoyed by few.
But a small hand full of investors, who understand how relative strength investing works, are able to do three key things:
- Stick with their winners without wavering.When the stock market is volatile (as has been the case), a strong relative strength signal keeps investors in their winning position instead of selling out of fear of a market pullback.The following chart shows one sector ETF that has been on a relative strength buy signal since January 2015.
Even though the position even lost approximately 10% from April 2015 - August 2015, so we were confident enough to hold the position.
- They can identify TRUE bullish reversals.
They knew that when this sector triggered a relative strength buy signal, it meant that the recent surge higher (circled in yellow) is most likely the beginning of a new long-term advance (instead of a short-term gain within a continued downtrend (like the red arrows, above).
- They can ignore the distracting rhetoric.
Take, for example, the latest talk about Apple Inc. (Symbol: AAPL).
Due to its popularity, market pundits use it to grab headlines and 15 seconds of fame by arguing on T.V. about which direction it should move in next.
Looking for ratings, they don't care if excited individual investors lose money after hearing the debate.
I say ignore the stock as a potential position but watch it for direction on what the general stock market might do next. After all, it's a major leader.
Here's how I evaluate a stock like Apple Inc...
I determine the risk, using relative strength studies.
Let's start with the relative strength of the "Computers" sector, which is Apple's peer group.
This is called "sector relative strength".
We focus on sector relative strength because approximately 80% of a stock's move can be attributed to the movement of the sector it's in.
If you can't read the "point and figure" style chart, above, then please allow me. The most recent direction is down (highlighted in yellow).
When the sector underperforms the general stock market, the reading declines. The reading began its decline from 660, in mid-March, to 530.
This was an early sign that the rising stock would soon be under pressure.
Fast forward to today...
The relative strength of the sector hasn't yet reversed up. I wouldn't even consider the stock until that happens.
Below, is another type of relative strength chart. But instead of the chart showing the relative strength of the Computers sector, verses the S&P 500, this time it shows the stock, itself, verses the S&P 500.
It has been making lower highs and lower lows since August of 2015. This shows long-term relative weakness in Apple Inc. verses the stock market.
When you see a stock on a relative strength sell signal, like Apple, I don't care how popular the stock is or how cool the iPhone is - I stay the heck away.
The second thing that stands out is the most recent column, being a down column (an "O-column"). This shows short-term relative weakness.
I wouldn't touch this thing. Not in a box, not with a fox, not if I'm Adam and not if I'm Eve. It's a bad apple and I don't care how much short-term pleasure one might gain from.
Stocks that have been underperformers to such a strong degree often do have strong short-covering rallies. And because it's so oversold, the pundits will tell you to take a bite.
But if I haven't been clear enough, let me show you another way to use relative strength to slice and dice this thing...
It's time to use three-dimensional relative strength!
It's so far down in the rankings that it's almost torn off of the page (like Textile and Apparel!).
This is the bottom part of our sector relative strength matrix, which basically creates 2,025 relative strength charts somewhere in cyberspace.
There's one relative strength chart of the Computers sector verses the Oil sector... There's another relative strength chart of the Computers sector verses the Retail sector and so on.
After being compared to each and every one of the other 45 sectors, the Computers sector is only on a relative strength buy signal verses 7 sectors. So the sector's rank of 42 is based on the low number of other sectors it's outperforming.
It's important to know if this is a new development, if it's an improving situation or a worsening situation.
Let's check out its ranking history...
As you can see, the sector dropped from being ranked #6 place on March 15th. to being ranked #40 on March 28th. And it has seen NO LOVE since then.
Again, here's the chart of Apple Inc.
The beauty of relative strength studies continues to go unseen by most people.
Thank goodness. More for me.
I believe we'll go another 400 years without most of the world catching on because we, as humans, are programmed to think we should buy what's beaten up and sell what's working out.
Hundreds of studies on the subject as well as my own experience have told me that the opposite is true.
I implore you to make relative strength a major part of your investment acumen. It's been known to change people's lives.
True Market Insider