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If there is any utility in labeling a general market environment a bear market, it is to offer an investor some sense of the direction of the dominant trend in prices in the indexes and the majority of individual stocks over a significant period. And it speaks to how many opportunities for reward the market offers versus the risk of loss.
In bear market cycles, such as the ones that ran from 2007 to 2009 and 2000 to 2003, rallies tend to be sharp but short-lived, merely interrupting deeper and more-treacherous declines, making the tactic of "buying dips" in one's favorite stocks hazardous. Another old maxim of bear markets is that they tend to spare few segments of the market, furnishing investors without many reliable hiding places.
A Shorthand Definition
A sudden, fleeting 20% drop in a market benchmark, such as what happened in the 1998 Asian-currency panic, met the facile, shorthand definition of a bear market. But that helped nobody, given the way stocks rebounded quickly and rose for more than a year thereafter.
There is obviously no financial-market equivalent of the National Oceanographic and Atmospheric Association's strict categorization of tropical storms and hurricanes. Setting aside all the reasons that the "bear market" label is pretty pointless for one stock, if there were one stock that merited such treatment, it would be Apple.
For most of this year, Apple operated as a sort of market or index in itself, the stock soaring from $400 to surpass $700 from Dec. 30 through mid-September, a run disturbed only by a 16% pullback from April into May. Along the way, the stock accounted for an enormous share of total market and options volume and grew to represent an outsized share in the portfolios of professional fund managers and individual investors alike.
An Exclusive Club
Apple shares peaked at a market value of $660 billion, making it the biggest U.S. company ever by that measure. According to Standard & Poor's, only five companies before have ever exceeded $500 billion, and all peaked at or below the $604 billion Microsoft Corp. (MSFT) reached in late 1999. The others were Cisco Systems Inc. (CSCO), Intel Corp. (INTC) and General Electric Co. (GE), all during the 1999-2000 period, and Exxon Mobil Corp. (XOM) in mid-2009.
At its peak, Apple represented more than 5% of the value of the S&P 500 index. Only five stocks over the past 40 years have accounted for more than 4.1% of the benchmark, according to UBS research from earlier this year. Those spent anywhere from four to 17 years above the 3% level, so it's possible to remain a very big, very important stock to the market for a long time.
There's no concrete reason such enormous heft alone should thwart continued appreciation in a company's stock, especially accounting for inflation and given the support of record Apple profits. Yet it does mean it takes that many more dollars and that much more enthusiasm to keep the stock aloft.
The tumble in Apple has clearly banished the aura of invincibility it enjoyed as recently as eight weeks ago, around the time of the iPhone 5 launch. The reasons given for this comeuppance are plentiful, from increasingly credible competition and merely incremental new-product innovation to possible higher taxes on overseas corporate profits and investors cashing out to lock in current capital-gains tax rates.
These are plausible causes. More important, though, is that this was an over-loved, heavily owned stock that investors of all creeds found exquisite excuses to buy. Growth-stock managers flocked to the enormous ramp in global sales of each iteration of Apple devices. Value investors extolled the novel discovery that shares of perhaps the world's best company traded at or below the overall market's price-to-earnings ratio, repeating the robotic mantra that "the stock is cheap."
Now that the stock has cracked so hard, so quickly, it appears poised for a fairly significant bounce before long. Oppenheimer on Wednesday called AAPL a buy on the recent weakness. Still, it's not clear investor sentiment on Apple has been sobered enough for the first bounce to become an enduring recovery.
Bespoke Investment Group says the stock is now almost 30% below the $763 average analyst price target, a level that, in the past, has typically augured at least a bounce. Bespoke points out, though, that 88% of the analysts that follow Apple still rate the stock a buy. That's an uncomfortable degree of stubborn bullishness that often needs to recede before the fever in a stock can truly be said to be broken.
The valuation — at 11-times fiscal 2013 forecast earnings and $100 billion of cash — should provide a cushion underneath the stock, but there are too many growth-obsessed investors still in it for valuation alone to carry it higher. ...
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