While Apple (NASDAQ:AAPL) has faced its share of headwinds over the past few months, having slid 40% from its historic high above $700 per share last September, the company seems to still be facing some real challenges. There is a real concern among investors and industry-watchers that the company's innovation rate has slowed significantly. Where Apple was once known not only as a technology leader but for its ability to remain focused on great projects, the company has become more reactionary, trying to compete with increasingly well-executed competition. Despite all of these issues, however, the single largest threat to Apple's share price is the health of the overall market.
Historic levels for the Dow
Tuesday's trading session has seen the Dow Jones Industrial Average break through all-time intraday highs, trading at levels not seen since 2007 and on pace to close above the record close set Oct. 9, 2007. Much of the run has been triggered by general optimism about the prospects for the economy looking ahead. The rise puts the index up over 8% so far this year and is marked by money moving into stocks. Reuters quotes Russell Investments' Chief Strategist Stephen Wood, who admits the move is not totally supported by fundamentals: "There is a lot of momentum and rotation going into equities from cash and bonds, and right now sentiment seems to have the upper hand over fundamentals."
While some disagree, many commentators attribute the rise to action of the Federal Reserve and Chairman Ben Bernanke. Recently, whenever the market has even paused for a breather, the Fed has aggressively pushed to keep the rally alive. Those who take a softer view see Bernanke's actions as providing liquidity only, and not being a driving factor in the rise. In either case, the Fed has played a significant role in the process, suggesting that any major policy shift has the potential to be a blow to the overall market.
The skeptics point out that these types of peaks often precipitate significant declines; the October 2007 peak came before stock indexes were essentially cut in half. While market internals are solid, the psychological impact of these various factors should not be ignored. Even if the rally has some room to run, the dance between the Fed and the market should be watched.
The Google effect
Over the past several months, as Apple has languished, Google has surged to its highest level of all-time. Apple has stagnated to some extent, reporting its lowest growth statistics in recent memory, while Google continues to find growth and innovation. Though the connection itself may be coincidental, Apple's troubles are certainly not hurting Google's ability to fight higher.
Can we all have a little patience?
UBS analyst Steve Miluovich reiterated his buy rating on Apple Tuesday morning, setting a $600 price target, but warning that investors will need to be patient: "The only way out might be innovation in new categories, which will require investor patience. Most companies would rush out a 5-6" phone; Apple probably won't." With investors clamoring for an iWatch, a cheap iPhone and Apple TV, Apple seems content to press forward at its own pace.
The threat of $400
Despite all of the above, the biggest threat to Apple shares at this point is a sell-off or correction in the broader market. Some would argue that after a 40% decline, the shares should be well insulated from the vagaries of the major indexes. Apple shares had no problem declining as the market fought to the new historic highs, so why should they have a problem moving higher if the market comes under pressure? The problem is that, as things stand, the company is not standing out as the beacon of technological progress that it once did.
If Apple is able to bring a new product to market and attract some positive attention, this may be the catalyst needed to put the stock back onto its own trajectory. If, however, as Milunovich suggests, Apple takes its time bringing anything new to market, that could trigger a disconnection from the broader trend, a correction will likely see shares dragged lower. If the psychologically important $400-per-share level is breached, you should expect a spike lower, if only briefly. Stops losses will be triggered and some investors will see this as a sign that the stock is in trouble. This spike, if it occurs, will likely be the best buying opportunity available for some time. Overall, the general market's direction remains the biggest threat to Apple going lower, so macro factors should become increasingly important to Apple shareholders.