Apple's (Nasdaq: AAPL) Meteoric Rise is Distorting Everything

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It happened almost a year ago, and it's happening again.

The meteoric rise in Apple Inc.'s (Nasdaq: AAPL) stock price is distorting the major benchmark indexes, including the Nasdaq-100, the Nasdaq Composite, and the S&P 500.

That is still true even though the Nasdaq executed a "special rebalancing" of its Nasdaq-100 tech-heavy index to reduce Apple's 20% weighting down to 12% last April.

With Apple's impact on the Nasdaq 100 now approaching 17% (that's greater than Google Inc. (Nasdaq: GOOG), Amazon.com Inc. (Nasdaq: AMZN) and Intel Corp. (Nasdaq: INTC)…combined), it's only a matter of time before another rebalancing takes a bite out of Apple's influence on this important index.

The problem isn't that Apple's share price has been so strong.

It's that investors may be unaware that the Nasdaq 100's rise and the Nasdaq Composite's jump to new 10-year highs wouldn't have been remotely possible without Apple's 60%+ gain since last summer.

Instead, investors need to understand Apple's impact on these market barometers and pay more attention to the core movements in those markets, not just the shine of a single stock.

Apple's Gigantic Impact

Apple's outsized impact on the Nasdaq-100 (NDX), which is a 100-stock index of the largest domestic and international non-financial companies listed on the Nasdaq, impacts in equal measure the popular $32 billion PowerShares QQQ Trust (Nasdaq: QQQ). The QQQ is an ETF based entirely on the NDX.

Apple's nearly 17% weighting in the NDX causes the NDX and the QQQ ETF to be closely correlated to Apple's stock whenever it makes a big move up or down.

The NDX (and by extension the QQQ ETF) is also a sub-set of the Nasdaq Composite Index.

The Nasdaq Composite Index (COMP) measures all of the domestic and international common stocks listed on The Nasdaq Stock Market. The COMP is one of the most widely followed and quoted major market indices.

Apple's weighting in the Nasdaq Composite is 10.6%. Thanks in no small part to this heavy weighting, the COMP is now approaching 3,000 – a level it hasn't seen since November 17, 2000.

But it's not just the tech-heavy NDX and COMP where Apple has an impact.

Apple's weighting in the monster of all institutional benchmarks, the S&P 500, is 3.8%. That's more than ExxonMobil Corp. (NYSE: XOM) at 3.3% and Microsoft Corp. (Nasdaq: MSFT) at 1.9%.

The Markets "Ex-Apple"

So how big of an impact has Apple singlehandedly had on the indices everybody watches, trades and measures performance against?

Apple's shares, which are up 26% this year (2012) has boosted the NDX (QQQ's) to a gain of 13.2%, and the S&P 500 to a 7.7% gain.

But, there are some worms in Apple's outsized weightings.

The stock is distorting broad market measures and masking, though still strong, a less robust market than investors realize.

The problem has become so acute that several major firms' analysts are delivering clients two sets of market reports, one with Apple included and one "ex-Apple."

The chief equity strategist at UBS AG (NYSE: UBS) creates two versions of his S&P 500 outlook reports; so do analysts at Goldman Sachs Group Inc. (NYSE: GS), Barclay's Capital, Wells Fargo & Co. (NYSE: WFC) and Morgan Stanley (NYSE: MS).

For example, they point out to clients that the S&P's fourth quarter 6.6% rise would have been only a 2.8% gain ex-Apple (reflecting Apple's 40% gain since Thanksgiving) and profit margin growth, which registered a 0.05% gain in the fourth quarter, would have actually been a negative 2.2% ex-Apple.

Of course, one way to not worry about Apple's positive impact on major indices is to have a huge position in the stock as part of your total portfolio.

Good luck with that if you don't already own it and can't afford it at its $510+ per share price.

But, it's not about how strong Apple is and how most investors have missed its sensational ride; it's about how much of an influence Apple has on investors' market perceptions.

And specifically, how strong or weak market metrics are ex-Apple.

So consider this your early warning: Apple stock has been beyond stellar, but Apple is not the market.

It just happens to be the market's biggest draw.

And right now Apple's heft is distorting everything.

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About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. Charles | February 22, 2012

    It is certainly distorting my single stock portfolio.

  2. baligeko | February 22, 2012

    The lesson is simple:
    invest directly in AAPL.

  3. Wulfher | February 22, 2012

    It's worth noting that Apple, even after its strong rise, only trades at about 14 times earnings. While this article doesn't state it, it implies that it is over bought. I don't think that this is the case. Long Apple.

  4. A.C. Night | February 22, 2012

    Maybe greed is good as the fictional Mr Gecko said. I don't, as a whole, agree with that stance. But I have to admit that as a holder of 500+ shares of Apple I'm not too concerned about its effect on the distortion of the market you so aptly described. I bought Apple at half the price it is now and agree with Gene Munster and other analysts that this stock will rise to 600+ (at least I hope so). Thanks for your very informative article.

  5. aliinoa | February 22, 2012

    One thing I know about the market is never follow the hype or the expectation. This article, though is sound, leaves me with a negative interpretation of a juggernaut to be, like google. But, most investors have they're portfolio over a broad spectrum of IPO's (tech, medical, commodities, etc), but this tech is proving to be extremely bullish and advantageous. I strongly agree with your position on future investors for aapl, but is the that not the name of the game…invest early, reap the benefits….?

    constructive criticism is always welcomed with open arms….please feel free.

  6. John | February 22, 2012

    > Good luck with that if you don't already own it and can't afford it at its $510+ per share price.

    What does this mean? If you can't buy $510 worth of stock, you shouldn't be buying any stock.

    • aliinoa | February 22, 2012

      Like Mr. A.C. Night, I myself am also a shareholder (not 500+) but it makes my portfolio flourish while allowing little risk for other opportunities. But simply stating that it shouldn't be bought at a certain price is redundant to what was previously said.

      What the "tell" for me was considering the P/E ratio while the company maintains or earns volume. Like A.C., I was in around $220 or so, but it does seem difficult now for the average consumer. But thats not to say you shouldn't buy stock just because you can't afford aapl, look at jamba juice for example. Cheap with opportunity and intriguing possibilities, they just secured a huge private sector tea manufacturer and are @ $1.90 a share.

      Or even JC Penney for that much.

  7. Nas Nuck | February 22, 2012

    You'd think that if AAPL is really that big it should dominate the index. Shouldn't it be a simple mathematical equation. If they equation says AAPL is a big part, AAPL is a big part. If some other companies start growing like mad, will they add back more AAPL to give them what they should have had? This game seems crooked to me, it shouldn't be about anything that no questions asked computation to determine weight within an index.

    • Aliinoa | February 23, 2012

      Really good point, something so simplistic as saying "it's distorting everything…", then clouding the view of the investor with percentages, etc. Doesn't really offer a straight answer as to why they are limiting aapl. Nice pick up nas.

  8. ZZZ | February 23, 2012

    Having bought my AAPL in 2003 at $7.50 (split adjusted) I really couldn't care less.:-)

  9. Marius | February 24, 2012

    Reading all this comments only reinforce one of the axioms of investing : "Crowds don't know what 'contrarian' means"! I suppose that's why they are slaughtered in masses.
    Looks like they don't know what "regresion to the means" really means….Or "taking profits while you can"…
    Whee, go Apple! Higher and higher!The ground is waiting for you…

  10. Ed | December 14, 2012

    Marius, you were so true, trees simply don't grow up to the sky

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