March 3, 2012- Possible signal of Correction

The past couple of weeks I have grown wary of the market. Up more than 10% for the year (after only 2 months), is something that does not keep up. Both historically and rationally the market must stop at this incredible pace. This could involve a correction (secondary downtrend) or a sideways trending market for a while. Many people have still been bullish, but slowly the bulls are turning bears.

First Reason for this: 

"Jonathan Golub, chief U.S. equity strategist for UBS.  Mr. Golub was asked about Apple’s earnings outlook.  In a recent essay, Golub stated that without Apple’s earnings, total U.S. corporate earnings growth goes from being in the mid-teens to only 2 percent."

(Rest of the Article Here)

So, basically Apple is keeping the S&P afloat by itself. Looking at Apples chart below, we can see that Apple's stock is moving at a very rare rate. Since December 1st (3 months ago), Apple stock is UP 40%. Its stock was valued at $389 on 12/1/11. yesterday it finished at $545. That is absurd. The last time Apple had that over a similar time period was back in June 2011. From the middle of June to August Apple went from ~$310 to ~$400. What happened next you ask? The stock corrected to about $350, then slowly trended sideways/up for the next 4 months until this last increase. I'm looking at a similar correction for Apple, and with that a correction in the S&P.

 

Second Reason For this: 

The Russell 2000 index ETF, which tracks the Russell 2000 index like the SPY tracks the S&P, crossed below its 30-day MA support level. Now, the Russell 2000 is actually a subset of the Russell 3000 index, which tracks the top 3000 U.S. companies according to Market Cap. The Russell 2000 then tracks the smallest 2000 of these 3000 companies. So, what does the Russell 2000 ETF crossing below its support mean? It means that the smaller cap stocks may not have the same growth potential as the larger cap stocks found in the S&P and DJ-30. It could also just be the first signal that the whole market is moving downwards, but this is why the stock market is a gamble. Recall what I said before in my post about indices, if either the Russell, S&P or Dow was in a downtrend, signaled by the index being below its 30-day MA, I would tread very lightly. Here is the chart of the Russell 2000 index ETF, also known as IWM.

 

This next week will really show what the markets made of. If the Russell reverses, the secondary downtrend could be put off for another couple weeks, but if the S&P follows, I would be extra careful. As of now I am slowly getting out of my long positions.