NASDAQ rebalancing = Short AAPL?
So due to a rebalancing of the NASDAQ 100 index, Apple's weight will drop from 20% to 12% of the index. How will this affect AAPL? The most likely guess is that AAPL will fall, as ETF funds tracking the NASDAQ 100 will automatically have to sell apple stock. Or will fund managers adjust their holdings and keep their amount of AAPL, because frankly much of their past performance was due to AAPL's stellar performance? Is the likely fall in AAPL already priced in?
This is a pretty interesting situation for two main reasons:
1) Apple is getting cut 40% in the Nasdaq
2) Apple is also in the S&P - the most common equity benchmark in the US, and also a heavily tracked index in the world.
The question of what do do here depends on what the relevant market players are going to do. The major players here are index tracking funds, and large active equity funds bench marked against either of these indexes.
Today: If I manage a active fund that tracks the S&P 500, I can trim an active bet on apple to flat in order to mitigate any risk from the market effects of the Nsdq re balancing. But, I don't have to worry about the reblance itself...as the weight in my benchmark shouldnt change much(unless there is a huuge market move).
If I am a benchmarked against the Nsdq directly its a toss up. I can try to rebalance early to avoid large market moves, but it will have to be gradual; otherwise I end up with a huge underweight position by holding 12%(plus or minus a view) today before the rebalance happens in May.
The passive guys face a different problem, in that they have to rebalance when the index rebalances.... they cant make a judgment call less their TE get too far out of whack. So we expect the passive funds to rebalance simultaneously with the index; the key is trying to understand the impact of those trades on market movement.
Most likely the net of the trading will push the likes of apple down and microsft + google etc up. However, assuming they are fairly priced today, these prices should bounce back. Market timing will be important to make money on this trade as fair value for each stock should return once short run supply and demand from index rebalance and active risk adjustments even out.
This is kinda a pain in the ass situation for anyone managing against the nasdaq as it forces your to adjust your bets in the short run. This short run shake up should present some opportunity to make money on both sides of the "bounce".
Great analysis. Summing it up you assume that there is going to be quite a large price frop for apple, because ETF fund managers are not allowed to hold portfolios siginificantly different from the fund they are supposed to be tracking for a substantial amount of time. What I wonder is whether non-ETF investors (such as hedge funds), who do not have to track the index, have figured that out and thus sold their long positions in aapl (vice versa for msft and goog). If you take a look at this link prices have diverged suspiciously on Monday already (insiders?) even though it was only announced today.
http://finance.yahoo.com/echarts?s=AAPL+Interactive#chart2:symbol=aapl;…
Apple's price would of course still drop further. But after everybody has adjusted their positions there should be a heck of a buying opportunity. Sure some ETF investors might not come back, but the ones who anticipated the drop might very well seize the opportunity to buy low.
I entered this exact pairs trade in thinkorswim.... short AAPL , long GOOG,MSFT,INTC. We'll see what happens...
full disclosure(its a demo acct).
I agree with your last statement fully. There will be good buying and selling opportunities from this rebalance. Timing will be critical. Monitoring volume, as well as open short interest in aapl might be key in timing this.
Let us know how that works out. The spread between aapl and msft was already 2 percentage points when markets opened and has since narrowed to 1,5% points. Google is down sharlpy though.
I think apple itself is due for a 10 to15% retraction, when there is talk that apple will over take exonmobil and become the largest market cap company in the world there is cause for concern. A company based almost entirely on discressionary spending worries me. The company is in my opinion insanely overvalued and is only fueld by Jobs. I for one am glad that this rebalancing is taking place it lowers the risk, even if its only slightly that if some bad news comes out of apple i.e. they horribly miss an earnings estimate, a major product recal, or Jobs' health rapidly deterioates, that the chances of this one company tanking the NASDAQ by itself are lowered.
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