April Webinar RegistrationApril Webinar Registration


Transport, Cyclicals Boost Stocks; Why Apple's Rally Is Not Over Yet

Apple's rebound on Tuesday indicates that institutional investors are not ready to completely exit the megacap tech. A rebound back above the 50-day line would mark a follow-on entry point. (Apple)

The gain by Apple (AAPL) in above-average turnover on Tuesday following a sharp two-session sell-off, plus rallies by a large number of cyclical areas of the stock market, appeared to suggest that the bull run is not dead yet.

Transportation, part of the cyclical sector, is rallying today with the Dow Jones transports up nearly 0.5%. In the mobile home and RV space, Cavco Industries (CVCO) (97 EPS Rating) survived a wild open to rally more than 9% to 129.80, rising more than 6% past a new flat base with a 121.80 buy point. The manufactured home specialist reported a 55% jump in fiscal fourth-quarter earnings to $1.19 a share, smashing the consensus estimate by more than 16%, on a 12% pickup in sales to $198 million.

On Friday, IBD's current outlook for U.S. equities was downgraded to "Uptrend under pressure" from "Confirmed uptrend" after the Nasdaq composite suffered a 1.8% drop in sharply higher volume, a telltale sign of unusually heavy professional selling. Over the past 25 sessions, the Nasdaq has encountered three such days of what IBD calls distribution, including a 2.6% slide on May 17.

Yet for now, the uptrend remains in place, and investors can cautiously buy new breakouts with the knowledge that downside risk is elevated. In fact, as IBD's The Big Picture column has noted over the years, breakouts that occur late in a run-up tend to show a higher rate of stumbling.

The current market uptrend really caught fire after the Nov. 8 U.S. elections. Since then, the Nasdaq has rallied more than 25%, a solid gain amid its nine-year rally that began with the March 2009 bottom.

On Tuesday, the Nasdaq composite led the key averages with a closing gain of just over 0.7%. The S&P 500 and the Dow Jones industrial average posted gains of 0.4% to 0.5% each. Volume fell sharply vs. Monday, according to preliminary data.

As seen in the daily chart PDF accompanying IBD's Big Picture column, the Nasdaq composite now has an Accumulation/Distribution Rating of C, which is neutral, but the S&P 500 sports a B grade and the Dow industrials a B+. A grade of B- or higher suggests that institutional investors are on net accumulating stock.

Keep in mind that although the Dow has a better Accumulation rating than the Nasdaq, it is lagging the latter index in terms of year-to-date gains, up less than 8%. The tech-heavy Nasdaq composite is up nearly 15%. Yet on the Dow 30, 16 names have an individual Accumulation/Distribution Rating of B- or better. See this rating and others at IBD Stock Checkup.

Apple, up nearly 1% to 146.59 in heavy turnover, is up more than 24% from a recent breakout at 118.12 and continues to act like a market leader because its drop below the 50-day moving average was not that deep. The megacap tech and Dow 30 component is now just a few points below the 50-day line (currently near 148.64) and paring losses.


IBD's TAKE: In the fourth quarter of 2016, Apple formed a bottoming base, a bullish chart pattern. Early-stage bases give an investor better odds of making money. Learn more about this pattern and other bullish bases at Investor's Corner.


IBD Chairman Bill O'Neil has said frequently that a top market leader in fundamentals, stock-price action and fund sponsorship that falls below the 50-day or 10-week line should continue to be watched if it does not sink through the key support level in the heaviest volume since the start of the move.

As seen in a daily chart, Apple's volume in the two recent down days do not exceed the 112 million-share day on Feb. 1 after the iPhone maker reported a clear turnaround in the top and bottom lines. Apple broke out of an early-stage cup with handle at 118.12 on Jan. 6-9.

Apple is forecast to grow earnings in FY 2017, ending in September, by 8% to $8.94 a share, then accelerate profits with an 18% jump in FY 2018. That latter estimate seems to bake in expectations of a strong product replacement cycle when the next iPhone comes out, likely in the fall of this year.

Apple's revenue growth is back on track as well; the top line rose 3% to $78.4 billion in the fiscal first quarter ended in December and 5% to $52.9 billion in Q2 (ended in March). The Street sees further revenue growth in Q3 (up 6%) and Q4 (up 8%), helping fuel EPS increases of 11% and 13% in the same periods.

In the prior four periods, Apple's profit dropped 23% and 15%, then turned around with gains of 2% and 11% vs. year-ago levels.

Elsewhere in the stock market today, economically sensitive issues are pacing the market's upside, including RV makers, automakers, oil drilling, ship transport and agricultural chemical producers. But water utility, gold, dairy product and gaming companies are also showing gains of well more than 1%.

Burland East, manager of the Altegris/AACA Opportunistic Real Estate mutual fund, told IBD that he sees very attractive opportunities in companies that have a large exposure to Macau because gaming-related revenue in the region has seen midteen growth in Q1 and Q2, a nice turnaround from what he sees as the bottom in the third quarter of last year.

"The pressures from the Chinese government have pulled back a bit, and it appears a new low has been set (in terms of business there)," East said. "For those with a five-year investment horizon, we think Macau will be very attractive."

Indeed, Las Vegas Sands (LVS) and Wynn Resorts (WYNN) have been market outperformers in 2017, so far up nicely since recent breakouts at 59.95 and 104.49, respectively. Wynn on Tuesday added 3% to 134.16. The stock has yet to touch its rising 50-day moving average since surpassing the proper cup-with-handle entry in mid-March.

Las Vegas Sands, up nearly 1.5% to 64.87, has now advanced 8% past the proper buy point. On the daily chart, notice how the stock had traded on the north side of its 50- and 200-day moving average lines while finishing its nearly six-month cup with handle.

The best cup bases tend to show declines from head to toe of 12% to no more than 33%. A milder decline means that a stock has less work to do to rally back near its highs before potentially breaking out.

Also, in Sands' cup with handle, the drop from the handle's high of 59.85 to its low of 56.33 was a mere 6%, less than the typical maximum allowed decline of 8% to 12%. Add 10 cents to the high of the handle to determine the exact buy point.

As of March 31, East's $151 million Opportunistic Real Estate fund shows a 10.9% net exposure in the gaming sector.

RELATED:

Apple News: It's Confirmed; Apple Is Going Into The Driving Tech Field

Investor's Corner: How To Spot Major Market Tops The Easy Way

Is Apple Near A New Buy Zone?

Top-Performing Companies In The Sector Leaders: How Are They Doing?