Apple takes a 12% hit and the balance of the market found a way to keep moving higher? The reality is most investors expected the worst, but were hoping for good news. While I am not convinced that the first quarter earnings were the worst, they did confirm that the once high flying company that could do no wrong, was showing cracks at best. But, the questions still loom, why did the balance of the market move higher? For one, Apple’s problem is more on the execution and competition side. The economic factor isn’t playing into the challenges facing the company near term and that is good news for the balance of the market. The summary argument from analyst is to believe that, first, that China is coming back and growth is increasing. Second, Europe’s sovereign debt crisis is subdued and money is flowing back into those markets. And third, the US markets are still growing, be it slowly, and the broad markets can continue towards new highs going forward, even without Apple. It all comes down to conviction about direction, and for now the consensus is higher.
Another observation worthy of note is the rotation back towards value versus growth. That was the theme for most of 2012. Off the November lows growth took the lead, but we have seen a subtle shift back towards value over the last few weeks. The leadership in the S&P 500 index has shifted back towards financials versus technology. Consumer services, healthcare and utilities have enjoyed favor the last three weeks as well. The dividend stocks, REITS, MLPs and other income producing assets have enjoyed a strong run since the first of the year. Based on the current outlook and analysis expect more of the same throughout 2013.
The bond market has continued to show pressure from rising interest rates. The 10 year Treasury yield now stands at 1.84%, up from 1.56% in November. The trend off the August low has been higher and if the resistance near the 2% mark gives way on the upside we could actually see the higher yields and lower bond prices in 2013. IEF, iShares 7-10 year Treasury Bond ETF off the high of $109.20 in November and currently trades at $107.04. The short term trend is down for the ETF and a break of support at the $106.40 mark would be another key breakdown for the bond. Similarly we are seeing a move lower in LQD, iShares Investment Grade Corp Bond ETF with key support at $120.40 currently only twenty-five cents away. BND, Vanguard Total Bond Market ETF broke lower in December and is currently attempting to hold support at $83.62. There are plenty of examples in the sector of fund moving lower over the last 6-13 weeks. Part of the pressure on bonds has come from stocks moving higher. The rotation of money back towards risk assets is putting downside pressure on bonds as well. This remains a sector to watch on the downside and if you own bonds they deserve a look relative to less exposure going forward.
Financials regained their footing on Thursday as the sector, DJ US Financial Index, climbed to another new high. DJ US Bank Index move above the 235 resistance level and hit a new high as well. Regional banks continued to move higher, but failed to establish a new high. The brokerage firms have been the clear leader since the first of the year. IAI, iShares Broker-Dealer ETF has gone vertical. Goldman Sachs, Citigroup, Morgan Stanley and Raymond James have led the sector higher. Insurance (KIE) since January has been equally impressive on the upside. The sector overall continues to be positive, but the parts that make up the whole have definitely offered up some sound returns over the last two months.
The worry about the current levels continue to surface everyday in one article or analyst report after another. But, you have to look at Thursday as a validation that the overall economic picture and anticipation of global growth are outweighing any concerns about being overbought technically. As with Apple, all good thing do eventually come to an end, but for now you continue to take what the market gives one day at a time, with stops in place to manage the potential risk that arise at any time on any day going forward.