Apple's drop 'not a good sign' for Nasdaq - analyst

As Apple falls into correction territory, Thomson Reuters Stocks Buzz Analyst Terence Gabriel tells Reuters' Fred Katayama why the Nasdaq may also be in for a plunge.

Video Transcript

FRED KATAYAMA: Stocks sliding Thursday as big-name tech stocks like Apple get unloaded. Let's get a technical view of the market from Terence Gabriel. He's Stocks Buzz analyst at Thomson Reuters. Good afternoon and welcome back, Terence. So Apple, I notice it's down 10% from its peak hit on January 26 of $143 a share. When the generals are retreating, like Apple, what does it mean for the overall market, say the NASDAQ or the S&P?

TERENCE GABRIEL: Yes, well, usually it's-- it's not a good sign when you have a stock as a key position that Apple is in, the largest capitalized stock in the US stock market. So it's very important. How Apple behaves is going to be significant for these indices that it is such a big part of. One of the things we noticed was that the-- the Apple relative to the NASDAQ 100 ratio had recently gotten up to a 30-year or so resistance line.

And that was a point at which we sort of had to see whether Apple was going to sort of break out to the upside relative to the NASDAQ and continue its sort of uninterrupted advance, or it could also signal a point where it would run into trouble on a relative basis. And as you said, interestingly enough, Apple's down about 10% since hitting that line in late January, whereas the NASDAQ 100 is only down about 2% or so from its recent high.

However, given the breakdown that we're seeing in that relationship of Apple relative to the NASDAQ 100, it looks like it's going to be more and more difficult for the NASDAQ to sort of defy Apple weakness in the event it intensifies, given what we've seen in the past when Apple has had these periods where it has sold off significantly.

FRED KATAYAMA: You say it's going to be hard for NASDAQ to defy. Is it NASDAQ 100 or, by extension, the NASDAQ itself if Apple keeps falling?

TERENCE GABRIEL: Well, certainly the NASDAQ 100, the largest-- 100 largest not capitalized stocks in the NASDAQ, and the broader NASDAQ, which includes many, many smaller stocks, of course. But ultimately Apple is a huge weight and is having the biggest impact on those indices. So if Apple is going to undergo further pressure, the likelihood is that these indices are going to feel that weight.

FRED KATAYAMA: And the indices will catch up to, what, Apple's drop?

TERENCE GABRIEL: Or, well, certainly they will experience a more significant period of weakness in the event we see Apple fall something like it fell last September, which was more than 20%. So it certainly looks as if, given the break we're seeing in Apple relative to the NASDAQ 100, that overall, the NASDAQ indices are going to be in for some trouble here unless Apple can reverse pretty quickly.

FRED KATAYAMA: And lastly, Terence, is the market, in your view, looking at all the indicators that you do, is it overheated at this point? And if so, is there a big correction to come.

TERENCE GABRIEL: Well, when we look at a lot of indicators, we see that they are-- both, say, market breadth indicators, market internal measures, momentum oscillators-- they are very overheated. Some of the market sort of breadth momentum measures I look at recently on the NASDAQ hit an all-time high. The advanced decline line on the New York Stock Exchange, all-time highs.

They're starting, however, to sort of, it looks like, kind of roll over. At least in the short term that's happened. It's a question of whether or not it becomes a more sustained decline. But certainly from these kinds of overheated levels, the market becomes very vulnerable to some kind of sell back of some degree.

Now, certainly we see a lot of complacency in this market, a sort of excessive bullishness, an expectation this is going to keep rising. But certainly with the 10-year US Treasury yield hitting its highest level since February of 2020, it seems to sort of bring risk back into the market suddenly. And it is from these kinds of conditions that the vulnerability, then, can lead to something a bit more than just a sudden 3% to 5% pullback.

So the potential would be for something much greater in the event that we start to see some important support levels start to give way. So, for example, if the S&P 500 were to break 3,694, it would come below its late-January trough. And that would be the first time since actually the advance began in March of 2020 that you would have seen one of the lows violated. So the index has been making higher lows and higher highs since March 2020. But if we come back under 3,694, we would then sort of end that pattern, and we would see, therefore, the market starting to roll over. So it's-- watching those kinds of levels, it's very important.

FRED KATAYAMA: All right, we'll keep an eye on S&P, 3,694. Thanks a lot, Terence. Our Thanks to Terence Gabriel of Thomson Reuters' Stocks Buzz. I'm Fred Katayama in New York. This is Reuters.