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Apple Could Kick Stock Market in the Core

NEW YORK ( TheStreet) -- At the open Thursday, Apple (AAPL - Get Report) was at $399.91. There are several reasons why Apple may be a bigger problem than you think.

In my article, If Apple Breaks $419, The Stock Market Will Break, I warned that a break of that critical support level would spell trouble for the entire stock market. It took only two trading sessions for this scenario to begin to play out.

Although it is true that Apple's stock price decoupled from the broader market several months ago, due to stock-specific idiosyncratic factors, I believe that the dramatic break of the key $419 support level on April 17 will tend to trigger more widespread worries about sales growth and profit margins for the stock market as a whole.

The Apple Economy

Apple is now the second most valuable stock in the world, after Exxon (XOM), in terms of market capitalization. However, it remains by far the most influential stock in global stock markets, from a technical standpoint, when other factors are taken into account, such as index weightings and dollar-weighted trading volume.

In terms of fundamental impact, the importance of Apple goes well beyond its top ranking in terms of EPS weighting (about 5%) in the S&P 500. As Apple's earnings go, so too will the earnings of dozens of Apple suppliers.

Cirrus' (CRUS) earnings warning on April 17, and the resulting 15% stock price collapse, which was based on a decline in Apple orders for one of its product lines, is just one example of how the fate of Apple is inextricably linked with the fate of many companies in the stock market -- particularly those that comprise technology sector indices, such as the Nasdaq 100 and index ETFs such as PowerShares QQQ (QQQ).

In particular, the probable secular decline in Apple's profit margins in the next few quarters and years, due to increasing competition, a commoditization of its products will most likely be mirrored by shrinking profit margins by Apple suppliers.

Broader Impact of Apple's Plunge

The most troubling thing for the market as a whole is that the worries about declining earnings in the "Apple economy" may serve as a psychological trigger that prompts many investors and traders to examine the deteriorating fundamentals in other sectors. For example, as a result of the ongoing crash in commodities prices, the EPS estimates of the entire basic materials sector of the S&P 500 are going to have to be revised drastically lower.
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