The major indexes cooled off in unison on Monday, taking a well-deserved break after rallying four weeks in a row. Meanwhile, Apple (AAPL) showed disappointing action with its third significant drop in four sessions — a 2% decline.
The stock, which led the market in 2017 with a stunning turnaround in fundamentals and a 46% advance last year, is now further below its 50-day moving average, which itself is flattening. Failure to rebound quickly back above the medium-term support and resistance line would indicate a serious correction is in store.
Meanwhile, some top-notch Chinese ADRs got thrown for a loop. Weibo (WB) sank nearly 3% in heavy turnover after getting penalized by the Chinese government for allowing some of its social media networks to showcase obscene content.
China Lodging (HTHT), a longtime member of the IBD 50, fell as much as 17% in the opening minutes of trade in mini-flash-crash fashion before shaving the decline to 4% at 150.41. The hotel chain sharply undercut a 142.90 buy point in a cup without handle but also got buying support near its rising 50-day moving average.
The Nasdaq composite fell 0.5% while the S&P 500 and the Dow Jones industrial average lost nearly 0.7%. Volume was higher on the NYSE vs. Friday, according to early data, and that likely points to a new distribution day for the 500. Nasdaq turnover came in close to Friday's level.
Distribution points to unusually heavy institutional selling in the market. A spate of such distributions can end a bull market. However, as noted in IBD's Big Picture column, the distribution day count on both the 500 and the Nasdaq remains low.
The S&P SmallCap 600 dropped 0.5%. Among IBD's 197 industry groups, homebuilders, computer hardware and peripherals, specialty enterprise software, gold mining, oil and gas machinery, coal and construction gear firms fell the most, each losing 2% or more.
Following another sell-off in U.S. Treasuries, homebuilders showed signs of heavy profit-taking by institutional players as no fewer than half a dozen names sliced through their 50-day moving averages in recent days. A failure to rebound quickly would mean it's time for individual investors to play smart defense and lock in at least partial profits.
Top-rated homebuilders that slid hard below the 50-day line include NVR (NVR), LGI Homes (LGIH), William Lyon Homes (WLH), D.R. Horton (DHI), Pulte Group (PHG) and Toll Bros. (TOL).
NVR initiated its strong price run with a big breakout past 1,845.47 on Jan. 25, 2017. Shares went on to double before the recent slide.
Going back to Apple, those who bought at the Oct. 27 breakout from a second-stage cup with handle at 160.97 need to be ready to exit that position to avoid taking a loss or surrendering all of the recent gains. At one point, the iPhone giant rallied 11.9% past that proper entry point. Through Monday's close, that post-breakout gain has been whittled down to 4%.
In IBD Stock Checkup, Apple's Accumulation/Distribution Rating has fallen fast and is now at a D+, indicating net selling by institutions over the past 13 weeks. A rating of C+ or higher on a scale of A to E is ideal, for it implies that overall demand for shares by mutual funds, pension funds, banks, insurers and the like is still positive.
Long-term holders, however, can continue to keep watching, even though results from Apple are due Thursday after the close. One reason is that the stock maintains a generous air cushion above its rising long-term 200-day moving average.
Two, amid all the headlines centered on iPhone X sales, the reality is that Apple has built an ecosystem that has enabled it to generate strong revenue growth in digital services. According to past IBD reports and statements by CEO Tim Cook, the company looks poised to achieve its goal of doubling its revenue in services by 2020.
Three, there is a good chance that the company can maintain its streak of low double-digit revenue growth. The Street sees revenue in the December-ended fiscal first quarter rising 11% to $86.75 billion, then increasing an additional 28%, 24% and 16% in the next three quarters. That's a significant improvement from gains of 3%, 5%, 7% and 12% in the prior four quarters.
Earnings are seen jumping 13% in Q1 to $3.81 a share, then climbing 37%, 32% and 21% vs. year-ago levels in the next three quarters through September 2018.
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