How Stock Market Corrections Beget New Market Leadership

Maybe better title’s for this blog post could be, “Why Apple’s Relative Strength is Key to this Market “, or “Could a Fed Policy Change Herald New Stock Market Leadership ?”

In 2011 and 2012, the only two stocks you really needed to own to show decent performance in a client account was Apple and IBM. Apple peaked out in September, 2012 and managed to correct 50%, while IBM topped out between late 2012, early 2013, and the stock hasn’t seen $215 since.

2013 was a great year for the SP 500 in general as the benchmark index rose 32% in calendar 2013, with Apple and IBM notably under-performing on the year.

The two market leadership “groups” the last 2 years, Apple and biotech, are being watched closely as both Apple and the BIB have gotten pounded in this correction. Apple is down from its peaks in February ’15 and July ’15 near $133. BIB, which is the “ultra” biotech ETF, (no positions and never owned BIB) is down 25% in the last 30 days, and 4.5% in the last 5 trading days. The IBB or the regular, unlevered biotech ETF was down 3.5% in the past week (as of Thursday, 9/3/15), and is down 12% in the past 30 days.

Looking back to the 1980’s and 1990’s 

These are “off-the-cuff” memories of significant market leadership changes over the last 25 – 30 years, that I can remember.

The point of the blog update being that when the SP 500 bottoms, and starts to work higher, the significant tell will be how Apple and biotech act as the SP 500 makes new highs:

  • As one portfolio manager put it in the late 1980’s, “No one will get fired buying IBM”, but with the 1987 Crash, and then the collapse of the high yield bond market shortly thereafter, IBM peaked at $43 per share (split-adjusted) in September, 1987 and ultimately bottomed in August, 1993 between $10 – $11 per share, after Big Blue never made the transition from big iron to the PC and server businesses. The point being IBM was widely held and highly regarded for the first half of the 1980’s – 1990’s bull market, until the 1987 Crash signaled a change in leadership, and the start of the Intel – Microsoft era.
  • The 1990’s were interesting from a stock market leadership perspective as the latter half of the decade was clearly large-cap leadership driven, as small and mid-cap asset classes faded badly, particularly after the October, 1998, Long-Term Capital Crisis. From the fall of 1998, to March of 2000, that entire 18 month “sprint” was driven primarily by large-cap tech, large-cap growth, and Financial sector leadership.
  • The “mother of all leadership changes” occurred in March of 2000, when the Technology sector peaked, along with large-cap growth, and gold, Energy and the commodities / emerging market’s bull market started in earnest, and lasted for most of the decade. Gold, which traded down to $200 in the late 1990’s, from its 1980 cash peak near $800, went on its infamous bull market run from early 2000 through late 2011, while large-cap Tech and Financials faded into under-performance.
  • The surprising aspect to the bull market of the last few years is the Health Care / Biotech market leadership. As this blog has written about a few times, the Health Care sector has been a clear leader in terms of revenue and earnings growth consistently for the last few years. Health Care hasn’t been a market leader as a group since the early 1990’s probably, when Large-cap pharma and the biotech’s were on fire.

A fed rate hike could signal a new era. Why I think the overall SP 500 remains in a secular bull market is that Financials and Technology, the two sectors decimated between 2000 – 2009, are still the largest weights in the SP 500 by market cap, and offer much better relative value today. Frankly there is very little about the SP 500 that worries me outside of biotech, given what appears to me to be reasonable valuation, as was detailed here.

For clients, my expected SP 500 return guidance for 2015 was flat to +10%. I still think that is a viable forecast.

I’ve been guiding clients to expect a “return to global growth” theme for years and that has been wrong. I’ve also guided clients to expect higher interest rates and that has been wrong. Maybe investors are moving closer to those investment scenarios.

Conclusion: Looking at the charts, biotech – as a group – doesn’t look that great. The 50-week moving average for the IBB is 211.68. On the daily chart, the IBB is struggling to hold its 200-day moving average. Right now, I have more faith that Apple will hold its leadership mantle than biotech.

Apple, like IBM in the 1980’s and Intel and Microsoft in the 1990’s is the key leadership “tell” for this market. If the SP 500 goes on to make a new all-time high, as I expect it will in late 2015 or early 2016, and Apple does not, that is your signal that SP 500 leadership is in the process of a longer-term change.

Just thinking out loud. Hope readers found something of value here.


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