It happened almost a year ago, and it's happening again.
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.
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 boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
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