Inside the Shifting Apple-Microsoft Dynamic on the Dow

This relative-strength signal suggests a choppy, range-bound stretch could be ahead for the Dow

by Bernie Schaeffer

Published on Oct 28, 2019 at 7:12 AM
Updated on Oct 28, 2019 at 7:12 AM

The following is a reprint of the market commentary from the November 2019 edition of The Option Advisor, published on October 25. For more information, or to subscribe to The Option Advisor -- featuring 10 new option trades each month -- visit our online store.

There's been something of a "changing of the guard" going on this quarter among the trillion-dollar tech titans of the Dow Jones Industrial Average (DJI) -- namely, Apple Inc (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT). While both stocks are leading the index on a year-to-date gain basis (on the order of 53.9% for Apple and 37.3% for Microsoft, as of this writing), the month-to-date returns for October tell a different story. Apple has gained more than 8% to emerge as the second-best Dow stock of the month so far, behind only UnitedHealth (UNH), while Microsoft has clawed ahead only 0.3%, just narrowly outpacing the Dow's own 0.7% decline for the period.

Thanks to its latest surge higher on the charts, Apple has finally recovered some of the ground it lost during last year's brutal fourth-quarter sell-off -- on a relative-strength basis, that is. As of Sept. 30, AAPL had a one-year relative-strength reading of -2.44% versus the broader Dow, while MSFT was at +19.26% against their parent index for the same time frame. But it was just a few trading days later, on Oct. 4, that Apple's one-year relative strength reading vs. the Dow finally moved into positive territory, arriving at 0.73% -- and this reading has since accelerated to its current perch of 3.18%.

In fact, per the accompanying chart, AAPL's relative strength vs. the Dow has been trending higher pretty consistently since mid-July -- which is approximately the same amount of time that MSFT's own relative strength performance has been turning choppy and flatlining, after a convincing uptrend in this metric that persisted during the bulk of the first half of 2019.

aapl msft vs dji 1 year chart

In the same vein, the chart below shows that AAPL's correlation with the broad S&P 500 Index (SPX) declined significantly and steadily over a years-long period beginning in the second half of 2016, before bottoming out and beginning to turn higher earlier in 2019. Now, AAPL's S&P correlation is hovering just below the 50% threshold, at 49.2% (compared to 75.7% for MSFT).

aapl msft spx correlation

As alluded to earlier, AAPL was hit quite a bit harder than either MSFT shares or the broader market during the heavy fourth-quarter 2018 selling. While the Dow shed 11.8% during the October-December stretch last year, and Microsoft gave up 11.2%, Apple wrapped up the final three months of 2018 with a staggering 30% deficit. The same was true during the May 2019 sell-off; MSFT lost 5.30% on the month and the Dow gave up 6.69%, while AAPL took a considerably steeper 12.76% haircut.

That said, this tendency for "magnified" price movements can also work in the bulls' favor when the pendulum swings back toward the bullish side. During the broad first-quarter 2019 rebound in equities, AAPL led the way with a 20.42% advance, accelerating past three-month gains of 16.12% for MSFT and 11.15% for the Dow. And this past June, Apple shares popped 13.05% for the month, easily outdoing Microsoft's 8.31% rise and the Dow's 7.19% gain.

In other words, whether the broad market is rising or falling, it's been quite likely that Apple is doing the same -- but more of it. Which brings us back to the subject of the stock's outsized October returns so far, particularly relative to its big-cap tech rival.

Since Apple joined the Dow over five years ago, it's been extremely rare for the iPhone stock to show up Microsoft on the charts by such a wide margin over such a tight time frame. According to Schaeffer's Senior Quantitative Analyst Rocky White, Oct. 21 marked just the fourth time that AAPL has collected a double-digit percentage gain during the same one-month stretch where MSFT has declined.

aapl outperformance signals

However, while AAPL goes on to outperform its typical one-month returns after a signal -- all three prior returns have been positive, averaging a 4.41% advance -- the stock's performance at the three-month and six-month checkpoints is considerably worse than usual. Bearing in mind that this is a very small sample size to compare against the 1,084 other six-month returns AAPL has generated over this time frame, the average post-signal return is a drop of 2.10%, with only 33% positive. That compares to an "anytime" six-month return of 7.33%, with 66% positive.

aapl after signals and anytime since 2015

As for MSFT, the Washington-based software monolith outperforms its own average anytime returns in the month following a signal, per the table below -- though it lags the magnitude of AAPL's continued short-term rally. However, Microsoft then goes on to outperform Apple by a wide margin at both the three-month and six-month points after a signal. In sharp contrast to AAPL's negative six-month post-signal performance, MSFT is 100% positive six months later, with an average return of 10.60% (though this falls short of its own anytime return of 14.09% for this interval).

msft after signals and anytime since 2015

Turning to the results for the Dow itself, the post-signal returns seem to point to one possibility -- a low-velocity sideways grind, at least for the intermediate term. Returns are 67% positive across the board, with median returns ranging from 1.04% at one month to 0.81% at six months. The average Dow return, meanwhile, is 1.21% after one month... then falls to 0.33% at three months, before recovering back up to 1.58% by six months. Adding to that, the three-month and six-month post-signal returns for the Dow are considerably weaker than its typical returns for those time frames.

dow after signals and anytime since 2015

Of course, none of this is necessarily prescriptive, given the limitations inherent in the size and scope of the study. But outside of these returns, another argument for a range-bound Dow can be made via its daily chart, which features support in the form of its rising 160-day moving average, and looming resistance in the form of a descending trendline connecting lower highs dating back to July -- currently located right around the 27,000 millennium level. So, barring a convincing short-term breakout above and beyond some of the "super round" numbers currently in play for major equity indexes, the rapidly shifting relationship between these two mega-cap Dow stocks is certainly one we'll be watching with interest in the weeks ahead.


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