Good Apple earnings bad for market?

Tuesday after the bell Apple Inc. (AAPL) topped analysts’ estimates yet again with the release of its latest quarterly earnings report. AAPL also raised revenue guidance above what Wall Street was expecting. Shares shot higher in after-hours trading.

AAPL said net income rose 78% to $3.25 billion, or $3.51 per share, from $1.8 billion, or $2.01 per share a year ago. In addition, revenue for the April-to-June period rose 61% from last year to $15.7 billion, making it the company’s highest quarterly revenue ever. Analysts surveyed by Thomson Reuters had forecast net income of $3.11 per share on $14.7 billion in revenue.
So, with AAPL’s earnings exceeding expectations, and the stock apparently ready to soar, will that be a good thing for the overall stock market?

While analyzing AAPL’s chart, and then switching to a chart of the S&P, I noticed and interesting correlation between the two charts over the past year. Could it be possible that what’s good for AAPL tends to foreshadow a sell-off in the market?

Please review the chart below with my notations added:

AAPL – 1 YR w/ S&P comparison

As you can see, I have noted each of AAPL’s last 3 earnings releases (blue). The top chart is that of AAPL and the bottom is a comparison chart of the S&P 500. Notice that in the case of all (3) earnings releases the overall market sold off to one extent or another shortly after AAPL’s earnings release. Generally, the sell-off began within a day or two of the release. As a technical analyst I am not as concerned with why this happens, rather just that it apparently does. However, AAPL is obviously a bellwether for tech, so might it simply be a case of “buy on the rumor, sell on the news”?

It appears that the S&P tends to rally for a day or two after the release of AAPL’s earnings. So, where might the S&P be if it rallied today?

Please review the chart below. The chart is from a previous newsletter of mine:

S&P – 1 YR

I have added the recent down trending resistance line in blue and the 50-day Simple Moving Average (SMA) in red, which has also been acting as resistance. After yesterday’s somewhat surprising market rally, the S&P stands just 5 points away from its 50 SMA, which is just slightly below the down trending resistance. Is it possible that after AAPL’s release the market is setting up for yet another sell-off?

Not so fast though! There is one slight difference between the (3) previous AAPL earnings releases and the latest one: The market was in a rally mode during the previously released AAPL earnings reports, but in the midst of a 3-4 month sell-off currently. Could that make the difference and break the trend of positive AAPL earnings = market sell-off?

The Tale of the Tape: There has been a recent trend of market sell-offs after AAPL earnings releases. However, this sell-off tends to start a day or two after the release. If that trend were to continue and the market were to have a slight rally after AAPL’s latest earnings release, the S&P would approach (2) very important resistance levels. At that point, one might want to raise protective stops on long positions in preparation for a potential sell-off or look to enter new short positions.

Waiting for the most opportune times that I have outlined above could provide you with the highest probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!
Christian Tharp, CMT