Apple is down 4% today for apparently no reason. There is no major news on Apple that would justify such a loss. Yet, over the past few months, the stock has been breaking down in an ominous way, usually for no reason other than heavy selling. What gives?
Here’s my take. Market leadership has narrowed in the US market as earnings estimates have come in. This year, we are starting to see earnings tick lower year-on-year for the first time in a long time. And Apple, with its huge market cap, is like Cisco or Microsoft were in the late 1990s in that they were must-own stocks for every closet indexer.
When Apple was going way up last year and early this year, the problem for portfolio managers was that under-owning Apple gave them a decided disadvantage in hitting their benchmarks since Apple was such a large percentage of the market, especially the technology market. For example, the Washington Post had a terrific chart in March that showed the difference in technology sector estimates with and without Apple. And the difference was enormous. My reaction was “To me, this is a worrying development and it does indeed make one think about 1999 and 2000.” Hence the comparisons to Cisco and Microsoft.
Now that Apple’s shares are going down, the opposite effect is true. if you over-own Apple, you get creamed and underperform. And that forces you to sell. Basically, all the indexers and closet indexers out there are forced to sell Apple because of days like today because they want to maintain their position vis-a-vis the benchmark index that determines their year-end bonus.
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