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The Apple-Driven Market

In the last 10 years or so, one company has not only revolutionized how we buy, store, and listen to music, but also how we communicate via their unique devices.  And talk about customer loyalty, there are only a handful of companies throughout history that can claim such fierce devotion to their products; of course we’re referring to Apple Corporation.

So why am I writing about Apple in an article dedicated to futures trading?  To some of you, it may be obvious that Apple is influencing the movement of not only the Nasdaq, but the broader market in general, and for the rest of you, this piece will try and get to the “Why” of this phenomenon.

Let’s start with the basics: all stock indexes, i.e. the Nasdaq 100, S&P 500, and Dow Jones industrial Average are aggregates of all the stocks in those indexes. These are then calculated to construct the Index. So as an example, the Nasdaq- 100 Index is taking the largest 100 companies in the Nasdaq market to assemble this particular Index. Most of the major equities indexes are cap weighted with the only exception being the Dow Jones Industrial average. The Nasdaq for example, is a Cap weighted index, therefore the more a company is worth, the bigger the influence that stock will have on price movement of its corresponding index. When referring to the “market cap” of a company this is simply the price of the stock multiplied by the shares outstanding. For instance, let’s say a company has 10 million shares outstanding and they’re currently priced at $30.00 per share.

The meteoric rise of Apple since 2009 has vaulted it to being the most valuable (in terms of market capitalization) company in the world, surpassing Exxon Mobil, which previously held that distinction. This in turn, makes it almost 20% of the weighting of the Nasdaq 100 Index. As you might have guessed, this fact makes it the most influential stock in the Nasdaq and S&P 500 index. This pull was clearly felt immediately after Apple reported a blow-out quarter on Tuesday, spurring a sharp rally in the entire US stock market.

To illustrate this point, I have superimposed the chart of Apple (the orange line) on top of that of the Nasdaq 100 futures (green line). In it we see the strong correlation between the two.

The question for traders going forward is if the inextricable link between Apple and the markets will break anytime soon. The answer is probably not, and if that’s the case, how does this determine the outlook for the market going forward?

In some of the recent XLT’s (Extended Learning Track courses) that I’ve taught, we have been using Apple to time some of our entries into the Nasdaq futures. Looking for those turning points in Apple has been very helpful in trading the NQ (Emini Nasdaq 100 Futures).  The tricky part is that on any given day Apple will lead the market, and on others it will be the broad market or other correlating markets taking the lead. We can get around some of these issues by using our odds enhancers taught in the XLT.

Moving forward, Apple has corrected over the last month and during that pullback created some supply levels that have to be tested.  The earnings gap made up a lot of ground quickly however, so we will be looking at some of these levels for guidance in shorting as well as buying the market in upcoming days.  So for now, Apple will continue to be a leadership stock, and we must keep an eye on it as the supply and demand levels  that form will help us gauge where it might reverse in the near term. One caveat, though: never let a great company (which undeniably Apple is) cloud your judgment as to when to short it, or take profits when you have them, because it is profits we’re after, not  falling in love with companies.

Until next time, I hope everyone has a wonderful week.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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