Value-Growth ETF Ratios

It still looks like a major relative low in value was made.

Apple All-Time Overvalued Level

The gap between economic reality and stock valuations is reaching new extremes. Apple is barely down 10 percent, but accounting for where macro and the overall stock market has moved, the stock is more "overvalued" today than it was in January. I put overvalued in quotes because value investors might say it was more expensive another time. I'm looking at it from a trading perspective. If the market heads to new lows, Apple will make a new low. For example, if SPY hits $340, I expect Apple will be at $120 or lower.

Apple Pop, Prepare for Drop

As discussed back in February, Apple and Microsoft were hitting their SEC-regulated natural limits in some growth funds. Long story short, even passive funds tracking indexes such as Russell 1000 Growth will be forced sellers of Apple or forced sellers of other holdings to stay within SEC rules. Rules are quarterly, percent of days in compliance, so August 15 or thereabouts is a date after which they have to be adjusting if they've drifted out of compliance.

Fund managers use modeling to try and track the index without replicating it, but it becomes harder when they are limits on what they can own. However, the main point remains: managers tracking the Russell 1000 Growth Index (IWF is an tracking ETF), either directly or as a benchmark, have almost no room to overweight Apple if they're tracking it. If Apple's weight increases because other stocks fall more than Apple, they have to sell Apple to stay in compliance.

Apple has a gap at $174 and change, I think that is the limit of upside risk. I took a short-term position against Apple this morning, with near-term options, assuming the market pulls back from here. Will assess going forward, but I will be looking to open a larger position out towards the September-October timeframe. The ratios are peaking, but if the overall market goes higher, Apple can go higher without lifting its ratio.

Apple Back to the Brick Wall

There's a little wiggle room because of fluctuation in the market, but Apple and Microsoft are still pushing 25 percent of the Russell 1000 Growth Index. As explained here, this makes for a headwind because fund managers may be forced into selling Apple should it outperform. Or if a stock such as Amazon outpeforms, the fund will have to sell Apple or Microsoft to make room for it under SEC rules.

This chart shows teh equal weight Russell 1000 Index divided by the market cap weighted index. Another view of the rally in stocks, as this ratio peaked in June right around when the stock market bottomed. Bears should keep Apple on their list of prime short candidates.

Apple itself: