The Iconoclast Investor

One of things we try to do each and every day is remained focused on the market’s leading stocks and sectors.  In a bull market, that means those stocks that are the apple of institutions’ eyes, which are being bought up day after day.

In a bear market, it’s just the opposite–identifying the handful of stocks that are leading the market lower.  The action of these leaders (or laggards) can provide a big clue as to discovering what the market’s next big move will be.

Back on May 29, I wrote an issue of Cabot Wealth Advisory that mentioned Lehman Brothers (LEH) as the canary in the financial coalmine.  To quote: “One thing for you to watch: Financial stocks … and Lehman Brothers (LEH) in particular.  In my view, LEH is the canary in the coalmine; the stock is threatening to break down again here, as rumors fly that the company owns a boatload of vague debt instruments that are worth next to nothing.  It’s not alone-many big banks like Wachovia (WB) and Bank of America (BAC) actually hit new 52-week lows this week, a stunning sign of weakness.

But I believe Lehman is the bellwether for the bears.  If it breaks below 35 in a decisive manner, I wouldn’t be surprised to see the overall market succumb to selling pressures.”  (Read the entire issue here.)

By now, we all know what happened–Lehman’s stock broke 35 at the very beginning of June and the market immediately began to unravel.  Since that time, the Dow has lost 1,200 points, the Nasdaq has plunged more than 10%, and, of course, Lehman itself has collapsed below 10.

What brought Lehman to my attention back then?  Simply that it was at the eye of the financial hurricane, and the fact that Bear Stearns had already effectively gone bankrupt meant Lehman’s demise was a possibility.  It was the worst stock in the worst sector, with numerous worries surrounding its debt.

What about now?  Is Lehman still the one stock to watch?  While it remains a laggard, the situation has become too obvious at this point–everyone knows Lehman is in trouble, and in the market, what everyone knows is rarely worth much.

As the major indexes test their 2008 lows, I believe a different stock is the one to watch–Apple (AAPL), the favorite of many individual and institutional investors.  This stock was the #1 leader on the way up during 2004-2007, but has been forming a big, deep and sloppy consolidation this year.  Earnings growth is slowing, and, simply put, the stock looks tired.

This month, the big-cap technology group (think Oracle, Intel, Research in Motion) has turned extremely weak, and while Apple has come down, it’s still attempting to hold up in the 150 area.  You can’t say the stock is totally broken at this point … but it’s close.

Usually, a bear market eventually gets every stock and sector, and I believe the upcoming action in AAPL will tell you whether the market will break its July lows … or whether the market will hold up and begin a new advance.

Watch the 150 level in AAPL.  Any big drop through there (possibly after a bounce of a few points) would tell me that the market is likely to decisively break its July lows, and will be led down by the big-cap technology group.