04/27/16   What Is Your Sell Criteria?

Editor’s Corner

Ron Rowland

Every stock-market cycle has its darlings—the stocks investors believe can do no wrong. I remember 1999 all too well. Microsoft (MSFT) and Dell (private since 2013) were two of the stocks that investors fell in love with during that era. However, those investors soon learned that loving a stock could have nasty consequences, because it is difficult to part with something you love.
These stocks, and many others, were devastated in the ensuing months and years. The “unattached” owners of these stocks disposed of their holdings as prices dropped or earnings failed to materialize. These disciplined investors had predefined criteria to alert them it was time to sell. The stock lovers lacked such discipline and went through various stages of denial, justification, rationalization, and other emotions as they watched their beloved stocks sink lower and lower.

In the current market cycle, it’s hard to imagine a stock that is more loved than Apple (AAPL). Back in 1999, it was despised, and many analysts were not convinced the company would even survive, let alone flourish. Fast forward to 2012. Apple became the most valuable company in history in terms of market capitalization, surpassing Microsoft’s December 30, 1999, valuation. Yesterday, it was still the largest component of the S&P 500 Index, accounting for 3.17% of the Index.

However, Apple’s stock price peaked 14 months ago at $133. Yesterday it closed below $105, and today it closed below $98. That is more than a 26% drop in 14 months. Apple released its quarterly earnings report yesterday, which is the reason for today’s downdraft. Earnings fell short of expectations by coming in at $1.90 per share, which was 10 cents below expectations and 18.5% below a year ago. Revenue fell by 13%, marking its first revenue decline in 13 years, and the first ever since the stock achieved “darling” status. Apple also reported that iPhone sales fell for the first time in history.

Now might be a good time to ask yourself if you are an investor or lover of Apple stock. It is already in a bear market, so if you haven’t sold it yet, then when will you sell it? You didn’t sell when it dropped 15%, and you didn’t sell when it dropped 25%. What will it take? A 50% drop? A 70% drop? Two quarters of declining revenue?

Many people are selling their Apple shares today, perhaps because it posted its first revenue decline in 13 years or perhaps because its price dropped below $100. Then again, an equal number of shares are being bought. It’s going to be a high volume day for Apple. I’m not predicting further demise for Apple stock, as this could turn out to be a great buying opportunity. What I’m suggesting is that you objectively consider your criteria for selling Apple or any other stock. Be sure to have an exit plan, preferably before you buy.

As expected, the Federal Reserve took no action at the conclusion of its FOMC meeting today. Analysts are parsing the contents of the press release, so you can expect to see some forecast revisions for when the Fed will make its next move.

Investor Heat Map 4/20/16


Signs of a significant sector rotation are visible again this week. The smokestack group of sectors, discussed here a week ago, are firmly in the leadership role again today. Energy and Materials swapped the top two positions, with Energy now completing its climb from last to first in the span of three weeks. Materials, now in second, has been no lower than fourth place for eight consecutive weeks. The Industrials sector rounds out the trio by maintaining its third-place position. Financials was a big upside mover, jumping from eighth to fourth. Health Care also climbed four spots higher to grab sixth. These ascents forced the higher-yielding sectors lower, with Telecom sliding one place to fifth, Real Estate dropping to eighth, and Utilities plunging to tenth. Technology lost momentum, but it was able to hang on to its ninth-place ranking. Consumer Staples is now the weakest sector and sits on the bottom for a second week.


Small-Cap Value assumed the lead, ending Mid-Cap Value’s seven-week stint at the top. Small-Cap Value has been the most volatile of the style categories, bouncing between second and sixth during these past seven weeks. Mid-Cap Value did not fall far, easing just one spot lower to second, while remaining prepared to resume the lead if Small-Cap Value’s volatility returns. Micro-Cap was the big upside mover, climbing three spots to third after being in last place just two weeks ago. Mid-Cap Blend fell four places to seventh, becoming the largest casualty of the relative strength rankings. However, it only gave up two momentum points in the process, while Mega-Cap lost six points and held its decline to a single spot. Large-Cap Growth is on the bottom for a second week.


The upper tier of the global rankings remains very steady, with Latin America and Canada supplying the one-two punch for nine consecutive weeks. Pacific ex-Japan and Emerging Markets have not been as consistent as the top two, but the duo in third place and fourth place have held those spots the majority of these nine weeks. The top three are all resource-rich regions, and they are benefiting from strength in the Materials and Energy sectors. The categories in fifth through tenth place are compressed, allowing Japan to jump four places higher without much effort. A week ago, China was ranked higher than this grouping, but it plunged six places lower and now sits at the bottom.



The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“ Can Apple grow again? That’s the big question. We don’t think it’s proven that it can.”

Abhey Lamba, analyst at Mizuho Securities


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