Nasdaq Rebalancing Should Have Minimal Effect on Apple

Includes: AAPL, QQQ
by: Jason Schwarz

According to Dave Nadig at, about $300 billion in funds are indexed to the Nasdaq 100. As a result, $60 billion in Apple (NASDAQ:AAPL) is tied to the index. With Apple currently at 20% of the QQQ and being forced to move to 12% by May 2nd that means the hit coming from Nasdaq 100 Index Funds will be approximately $24 billion (70.588 million shares). Apple’s average daily trading volume over the last three months is 18,071,400 shares per day or the equivalent of $6.1 billion. Between Monday (when we expected the Nasdaq selling began) and May 2nd, there are twenty trading days. If the rebalancing is evenly distributed that would mean that $1.2 billion per day (3.529 million shares) needs to be sold into the average daily volume of $6.1 billion (18.071 million shares). Nobody knows exactly how and when the rebalancing will take place because each party will act according to their own interest. Some may even choose to sell after May 2nd. To put these numbers in context, consider that during the January earnings report the three day volume of shares was 67 million, 40 million, and 27 million. Obviously Nasdaq spent a lot of time preparing for this rebalance and chose to do so at a time that would least impact Apple shares because it is the largest holding of the Nasdaq 100.

The last special Nasdaq rebalancing occurred back in December 1998, to reduce the impact of Microsoft (NASDAQ:MSFT) which made up more than 25% of the index. How was Microsoft's stock affected by the selling pressure? In November of 1998 the stock increased from $106.37 to $122, in December the stock increased from $122 to $138 and in January the stock increased from $139 to $175. With the impact of Apple’s rebalancing to be relatively small at 3.5 million shares per day it is plausible that the stock can rise in such an environment.

The easy money run up prior to earnings may be in jeopardy because of this rebalancing, which is fine, as long as you are positioned correctly. What’s happening to Apple right now has happened many times before, it’s the nature of Wall Street to introduce unforeseen variables into the equation. Apple initially got hit by the iPhone 5 delay rumors and subsequently got hit by the Nasdaq rebalancing. There's a case to be made that the Nasdaq rebalancing will end up having a positive effect on Apple stock because it will limit hedge fund manipulation. The primary reason why hedge funds manipulate Apple is because it gives them leverage over the index. Without a 20% weighting, Apple is less appealing for this purpose. As is typical for Apple, the sentiment will soon shift once again towards the growth fundamentals that include the blistering pace of iPad 2 sales along with the gold mine known as Apple China. The greatest things about Apple fundamentals is that they enable the stock to bounce. We will be using our cash to buy any dips. We refuse to sell Apple at a low, this is a stock that should only be sold at highs. Nasdaq rebalancing should have a minimal effect on Apple.

Disclosure: I am long AAPL.