Why Apple plummets on no news

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. 

Here’s how I put it in April:

Yesterday, I saw a note from the FT which indicated that “without Apple the earnings of S&P 500 companies would show zero growth as companies have mostly beat low expectations.” That’s huge. It tells you that market leadership in the US market is very narrow and that Apple’s continued earnings performance will have a big psychological impact on how the market proceeds going forward. More than that, the momentum in Apple gets back to Jeremy Grantham’s comments in the post I wrote “Grantham: Missing a bull market is a dismissible offense“.Apple’s rise in the market is a result of portfolio managers’ being forced to buy Apple in order to beat their index benchmarks. Apple has performed much better than other stocks and this has buoyed shares. But shares have risen a lot more because of Apple’s huge size forcing nearly every closet indexing manager to buy Apple in order to not underperform. The higher Apple went, the more closet indexers had to buy. This is also true in reverse. If Apple’s shares fall, you do not want to own it as indexer. You will have to sell so as to beat your benchmark. This makes Apple more volatile.

So, I don’t think there’s anything to the sell off frankly. Barron’s is saying it’s margin calls and an article from DigiTimes. The Wall Street Journal is citing the death cross as an ominous technical obstacle. No matter how you look at it, Apple is now down 25% in two months and that’s bad for its investors. Shorter-term, that’s manageable if Apple has a good quarter as I am expecting. My longer-term view is that worse is to come. This is not a buying opportunity for Apple’s stock. For the market as a whole, it confirms a loss of leadership and is a bad technical sign for this cyclical bull.

UPDATE: Also see Apple’s Halo Cracked in the Wall Street Journal. It suggests that Apple’s upside momentum has completely dissipated.