[Apple shares are up $27 since this commentary went out early Monday morning. However, there was no sign that  it was having a positive effect on the stock market, since the Dow Industrials were down for most of the session and closed unchanged.  I doubt this divergence can continue for long, so either Apple returns to earth or the broad averages start showing some of that old irrational exuberance. RA]

A ZeroHedge reader who goes by the handle “Kito” took me to task last week for straddling the fence. On the one hand, he observed, I have been predicting a huge Dow rally to 14969. More recently, though, in a commentary published last week and rightly seized on by Kito, I said to hell with the bullish target; with Apple, IBM and Google shares getting bludgeoned, it’s only a matter of time before the bloodshed spreads to the broad averages. So which is it, Kito has asked? Am I bullish or bearish? I dodged his question, suggesting that he “ask around the neighborhood” about my track record as a forecaster.  This was disingenuous, since it implicitly asked him to excuse my waffling merely because my subscribers would likely attest to the accuracy of my forecasts in the past. As we know, however, in the forecasting business a guru is no better than his last prediction.  With Kito’s criticism in mind, as well as the best interests of my subscribers, I’m getting off the fence this morning to offer as clear a forecast as I can  — one that I hope will be illuminating and useful to all.

Let me first say that no chartist possesses a crystal ball. Technical analysis cannot divine the future; it can only help, if combined with horse sense, in estimating the odds of various speculative scenarios.  It is in that context that I see the performance of Apple’s shares in the week ahead as crucial to the stock market’s performance for the remainder of 2012.  I’ve been monitoring

Apple closely because I consider it to be the key bellwether for the U.S. stock market. If this assumption is correct, AAPL must get in bullish gear this week or it’s going to weigh on the broad averages for the rest of the year.  Stocks are already under pressure because some big companies – most recently McDonald’s, IBM and Google —  have reported lower quarterly sales for the first time in three years.  If this represents just a temporary dip in business rather than a trend, we should see Apple erupt before Thursday’s earnings announcement.  Moreover, if such news is indeed coming, the company’s shares should bottom this morning or tomorrow at the latest, and then embark on a 150-point rally to new all-time highs by year-end.  I am also predicting that if the rally comes, at least a third of it (i.e., 50 points) will occur by Thursday night.

Some Negatives

Whatever happens, Apple has a big week ahead of it, including not only the earnings report, but also the introduction of an important new product, the mini iPad.  Regarding sales, the company had better not disappoint, since AAPL shares are already under pressure following a 13.4% decline over the last 30 days.  Not surprisingly, weakness has flushed out some possible reasons to shun the stock, including growing competition from Android-powered phones, most particularly Samsung’s Galaxy.  Others believe Apple has become too dependent on a few products that have saturated their respective markets. And there’s also the reported reluctance of carriers to continue subsidizing iPhone buyers because the practice has become too expensive for them.

With the stock falling hard in recent weeks, it is easy to overweight these negatives and underweight the positives.  But the bullish case remains formidable – sufficiently so that we shouldn’t rule out the possibility that Apple is about to stage a rebound powerful enough to pull the broad averages higher into 2013.  How’s that?  For one, the carriers, most recently Verizon, appear to have changed their minds about eliminating iPhone giveaways. Considering that service contracts required of iPhone buyers can generate $1800 for a carrier over just two years, it’s easy to understand why they have had a change of heart.  For its part, Apple Inc. continues to enjoy such high demand for iPhones and iPads that it has been possible to maintain, by far, the highest profit margins in the business. This fact was probably not lost to Google shareholders who drove the stock down by nearly 90 points last week.

Low PE Ratio

Putting aside the seemingly insatiable craving for its products, strong demand for AAPL shares has faltered only for brief periods in the last decade and seems likely to return with shares currently priced 13% below September’s all-time high of $705.  Even if buyers don’t come stampeding back, institutional investors, who own roughly 700 million shares of a 950-million-share float, are unlikely to bail out at these levels for a couple of reasons. For one, how many world-beating companies can be bought for just 10 times earnings? In that respect, Apple at $600 a share qualifies as a fire-sale bargain. And for two, Apple stores have been packed with buyers since the release a month ago of iPhone5, making truly bad or even merely disappointing earnings a bad bet. Whatever happens, we’ll stick with our prediction that Apple’s performance this week is going to determine how U.S. stocks finish the year.

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