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As Apple Sours, Take a Bite of Small Cap

Stocks in this article: IYW AAPL QQQ IJR PSCT

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( The FRED Report) -- The stock market rally continues, in line with our forecast, and we maintain our targets of 1400 to 1430 on the S&P 500 Index (SPX). But, there have been some interesting sector developments.

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The biggest concern has been some of the action in Technology, which has been one of the leading sectors -- we show a chart of iShares DJ US Technology (IYW) below.

Many pundits are suggesting that the lion's share of the sector (and possibly market!) move has been because of Apple (AAPL).

We do not agree with this as many technical indicators, such as advance decline oscillators, new highs/new lows and others, have supported the rally. Interested readers can see these in our Monthly Review. In addition, AAPL has had a key reversal day, where it made a higher high and lower low than the previous day. We show a chart of this below.

This key reversal pattern may turn out to be a significant high for AAPL. But, how will we know? It is relatively simple - if the high at 526.29 on February 15 is exceeded in the next two weeks the stock is fine. If the stock breaks below the low of 496.89 there could be problems, and the stock may decline toward 420 or so. This would likely affect the IYW, above, and the QQQ, below.

We want to show readers an interesting alternative to big cap technology -- small cap technology, shown below. This is an interesting idea, because U.S. small caps may outperform over the next year. We show a long-term chart of IJR below, and note that it has recently made all-time highs again. Small cap stocks almost always outperform when the economy is getting better after a recession. As economic numbers get better, these stocks have a tendency to outperform.

In conclusion, AAPL may be weakening, so we recommend readers work with their advisors on a risk management strategy in the event that something does go wrong. At the same time, few analysts are recommending small cap names, yet conditions are ripe for them to outperform. Thus, we suggest an allocation to small-cap technology at this time.

Fred Meissner is founder and publisher of The Fred Report. Fred is a CMT and past President of the Market Technicians Association (MTA). He recently left Merrill Lynch's Market Analysis Department and Sector Strategy Department to form The Fred Report.�A detailed bio is here:Fred Meissner.

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