The Bulls are Hiding in Apple

Keystone

A keystone is the wedge-shaped stone piece at the apex of a masonry arch, the generally round one at the apex of a vault. In both cases it is the final piece placed during construction and locks all the stones into position, allowing the arch or vault to bear weight. In both arches and vaults, keystones are often enlarged beyond the structural requirements, and often decorated in some way. Keystones are often placed in the centre of the flat top of openings such as doors and windows, essentially for decorative effect.

The ratio of Apple to XLK hit a new high. As of Friday, August 25, Apple was 24.79 percent of SPDR Technology (XLK). These are moving targets, but if Apple outperforms XLK by about 1.1 percentage points, it will cross the 25-percent regulatory limit. Since the quarter is half over, the fund can allow Apple to rise and stay compliant until the end of September. However, Apple is effectively at its regulatory limit. If it keeps outperforming, it will be force-sold because it cannot remain above a 25-percent weighting.

It's obvious to me that Apple will underperform other technology stocks going forward. The cultish devotion to Apple products may have no limit, but the devotion to Apple stock does. As I explained 10 days ago, there are scenarios where Apple rises such as a broad bull market, but ones where Apple leads the tech sector are extremely outlier events. Impossible scenarios if you ask me. If this is a bear market, there are only two scenarios for Apple.

Scenario One is Apple holds up all the way until the end. Stocks such as Nvidia, Intel, Mastercard and Visa lose (for purposes of illustration, not forecasts) 30 to 50 percent, while Apple is down maybe 25 percent. Managers and investors keep their Apple while dumping everything else tech related first. Passive indexers become forced sellers as Apple weightings in funds surpass regulatory limits. In the final panic phase into the lows, Apple implodes because sellers have to start selling Apple if they want to raise more cash. There will be many "Apple is relatively overvalued" articles. There will be tech stocks selling at 90-percent or higher discounts and Apple only 30 percent off its high. Value guys will make the case for selling Apple and buying beaten down software, semiconductors and so on.

Scenario Two is Apple helps trigger the next bear wave and leads the sell-off. One out of every four dollars redeemed from tech funds such as XLK will be sales of Apple stock. As soon as redemptions exceed inflows, the plug is pulled on Apple and the stock market.