Is Apple Too Big For This Market?

| About: Apple Inc. (AAPL)

Illinois Tool Works (NYSE:ITW) is a manufacturer of industrial products and equipment. The company was founded 100 years ago and is a leader in its industry. In 2011, the company posted revenue of $17.79 billion and net income of more than $2.07 billion. In 2013, the company is projected for nearly $20.5 billion in revenue and more than $2.5 billion in net income.

Now, you might be confused with the opening paragraph after reading the title. That is the point. Illinois Tool Works has a market cap of $26.8 billion as of Wednesday's close. So what does that have to do with Apple (NASDAQ:AAPL)? Good question.

From its high point on Wednesday to its close, Apple lost $26.9 billion in market cap, based on an estimated 942 million shares. Apple had a little less than that at the end of last quarter, but remember that the share count is constantly going up due to no buyback and options expirations. Apple fell almost $29 off its high yesterday, which is a market cap loss of nearly $27 billion dollars.

If that market cap loss was Illinois Tool Works, the company would have been wiped out completely. So the question must be asked, is Apple too big for this market currently?

Well, we know that in 2011 the NASDAQ (NASDAQ:QQQ) composite rebalanced the NASDAQ 100 and lessened the weight of Apple. Could the index rebalance again? It's quite possible.

How big is Apple right now? Well, if you look at the iShares Dow Jones US Technology sector ETF (NYSEARCA:IYW), Apple is nearly a 19% weight of the entire ETF. That's right, 19%. This means that for every $5 of the ETF you buy, you are getting nearly $1 of Apple. That's not a lot of diversification. IBM and Microsoft (NASDAQ:MSFT) are the next two components of the ETF, and combined, have less of a weighting than Apple. Now as of close Wednesday, IBM and Microsoft have a market cap about $10 billion more than Apple. We know that the IYW is rebalanced daily, but if you compare Apple's market cap with Google (NASDAQ:GOOG), Apple should only have a weighting of about 15% or so, not the nearly 19% it does.

These days, it seems that as Apple goes, so does the market. When Apple turned lower yesterday, so did the market. The NASDAQ composite was up nearly 1% at its high yesterday, and closed down about 0.5%. When Apple starts to turn lower, it's not just Apple that goes. Other stocks trade down in tandem, and that brings down the whole market.

Now, I'm not trying to be an Apple bear, and I'm not negative on the stock. All I'm saying is that when a company gets this big, it is time to step back and see if it's realistic. Everyone loves Apple right now, which is why shares jumped nearly $100 from the pre-earnings level to Wednesday's high. Yes, Apple is the largest company by market cap, and so it should be a high weight. But if everything revolves around Apple, why are we bothering to trade anything else? Shouldn't we just get rid of all indices and only care about what Apple does? Lately, it seems that is true.

As a follow up, Apple opened lower Thursday morning, trading down as low as $486.63. Apple has lost almost $37.5 billion in market cap since Wednesday's high. That loss is now equal to the entire market cap of Emerson Electric (NYSE:EMR). We've seen the NASDAQ rebalance before, taking down the weight of Apple. Maybe it is time to look at doing that again.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.