By John Nyaradi
Many of us were warned as young children about how one bad apple can spoil the entire bunch. The metaphor was often used as part of an admonishment to avoid any "bad kid" who would have a "contaminating" influence on his or her circle of friends.
We have recently seen the Nasdaq Composite and Nasdaq 100 indices (QQQ) experience a bad day when the Dow and the S&P 500 (SPY) finish that same day with some nice advances. It has become more recently the case that Apple (AAPL) gets blamed for dragging down the entire index on such days.
Even before the death of CEO Steve Jobs, Apple got some bad publicity when China-based Foxconn, the assembler of the iPhone (as well as phones from a number of other manufacturers) became the subject of a "sweatshop" scandal. With the release of the iPhone 5, Apple faced criticism for the phone's flawed map application as well as a problem with the phone's camera performance, known as "purple haze".
Despite Apple's August victory against competitor Samsung (SSNLF.PK) in a patent infringement lawsuit, the United States Court of Appeals for the Federal Circuit dealt a blow to Apple in another patent suit on October 11, by overturning a temporary injunction banning the sale of Samsung's Galaxy Nexus smartphone. Apple shares began their decline during that day's session just before 11:00 - exactly the same time at which the Nasdaq Composite index headed south. In fact, by superimposing the AAPL chart for the past 180 days over the Nasdaq Composite chart, a striking correlation becomes apparent.
chart courtesy of StockCharts.com
With a market capitalization of over $588 billion and over 900 million outstanding shares, Apple's average daily volume of over 15 million shares amounts to over $9.5 billion dollars per day being spent on Apple stock. In fact, Apple accounts for nearly 12% of the weight of the Nasdaq Composite, which is twice the rating of its nearest runner-up, Microsoft (MSFT).
On May 2, Apple's weight on the Nasdaq 100 Index was cut from 20.5% to 12.3%. Despite the adjustment, it was not until the holiday-dominated first week of July when we saw the Nasdaq 100 (QQQ) decline by 10 basis points (0.1%) while Apple gained 3.7%. Beyond its status as a component of the S&P 500, Apple's weight on that index accounts for 4 percent. During the first quarter of 2012, Apple's impact on the performance of the S&P 500 (SPY) exceeded its weight, with Apple bringing in 5.4% of the profits for that index.
Apple's influence on ETFs is also quite significant. Last spring, the PowerShares QQQ Trust ETF had just over 17% of its assets invested in Apple. Apple currently comprises just over 20% of the QQQ's assets. Apple is also the top holding of the Technology Select Sector SPDR ETF (XLK), comprising slightly less than 20% of the fund's assets. The second most significant component of the XLK ETF is Microsoft, representing just over 8% of the fund's holdings.
Given Apple's enormous footprint on the Nasdaq 100, the QQQ ETF and the XLK ETF, one cannot overlook the fact that Apple's share value has been declining since September 22; its relative strength index has fallen to approximately 35 and at near $628 per share, AAPL is well below its 50-day moving average. The picture for the Nasdaq 100 Index, the PowerShares QQQ ETF and the Technology SPDR ETF (XLK) is the same, with the major indexes and technology ETFs tracking lower with Apple's recent moves.
Bottom line: As Apple begins to spoil, its contaminating impact on the Nasdaq 100 and the ETFs which are so heavily weighted toward Apple cannot be ignored. It's very likely that we'll need to see a trend change in Apple before we'll see a trend change in the Nasdaq 100 and S&P 500 indexes. Keep your eye on Apple. If it continues falling from the tree, the broader U.S. stock market could fall, as one bad apple can, indeed, spoil the whole bunch.
Disclosure: Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time.
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