Apple is Doomed

I've been mulling over the fact that Apple and Microsoft Hit Their Natural Limits.

I tried to think of another stock that surged as a share of the index in a bear market, and I can't. The major tech stocks declined when the dotcom bubble burst. The best case for the Apple bulls might be Exxon Mobil, which peaked at the market low in March 2009 versus the S&P 500 Index and in December 2008 versus the Nasdaq.

Theoretically, Apple could behave the same way, but I doubt it. I expect that tech will be a driver of the bear market. Apple is heavily weighted in most growth and technology funds. Apple is already at its "natural limit" because of SEC fund regulations. If Apple outperforms in an up or down market, managers will be forced sellers.

If you know managers have to sell Apple, do you want to be buying against a wall of forced selling? It creates a paradox because the logical move is front-run the selling (cause Apple to underperform), which obviates the need for forced selling by managers. However, there is no paradox on direction: Apple faces a headwind of sellers one way or another.

There's another factor in play: capital flows. Bulls have been buying the dip. The relative performance of Apple shows money went into Apple. What will a growth-fund manager sell if redemptions start coming in? Will they sell a stock hitting regulatory limits or sell something like Facebook that's already down 40 percent? I can't imagine meeting redemptions by selling the more illiquid holdings such as cloud software. A large fund company like Fidelity or Vanguard would probably cause 20-percent or larger drops in a day if they tried unloading those stocks in heavy selling. Whereas Apple is kind of like gold right now...it went up more than the overall market in the rally despite holding up in the first wave of selling. If forced selling begins because of redemptions, stocks such as Apple and Microsoft are the obvious top candidates for raising cash or meeting redemptions.

That isn't to say Apple will be the worst performing stock, but if I'm correct in my assessment, options on stocks such as Apple and Microsoft are cheap relative to their potential losses. As for the leaders on the downside, I would bet on the Facebooks and Teslas. The Facebooks are stocks that have been hammered. Some fund investors will question why the fund still owns it when it's obviously a bad stock. (Note these are the same people who, if they found out the fund didn't own Facebook in December, would have been calling for the manager to be fired.) The Teslas are the speculative stocks that in hindsight, no manager can defend owning. These are stocks that funds will be looking to drop out of the Top 10 holdings list ASAP. A stock such as Shopify might have landed in that category already:

Stocks such as Shopify also make the case for a weaker Apple. Shopify is down 63 percent from its high. Managers might want it off their books. It looks like a trip back to $300 (the March 2020 low) is likely. But how much can they sell and would they sell into a panic sell-off?

There are no good choices for growth managers because they are trapped, but that's why as with ARKK last year, it will be very profitable to game which stocks are going to be sucked down the drain when the panic sets into the large-cap technology space. Or which stocks might be very good options plays even if they outperform the sector, because the sector itself is going down the drain.