Whew! At least I don’t own Apple stock…

Ouch: Make that: I don’t own Apple stock directly.

Except for a couple of legacy stocks, I shy away from individual company stocks.

My history has been dismal when I’ve tried to pick individual stocks. I either buy at the peak … or, hold winners until they become losers.

So, my equity investments tend to be in broad market ETFs and low-cost mutual funds.

I used to think that they insulated me from wild swings in individual stock prices.

If true, yesterday’s steep drop in Apple should have been lost in the round.

Not so, as evidenced by the hammering that the Dow and S&P took yesterday.

One analysis I saw indicated that Apple was directly responsible for over 15% of the Dow’s decline … and indirectly responsible for the rest … either by dragging other tech stocks with it, or by seeming to be a leading indicator of economic troubles ahead.


For example, consider the SPY ETF…



As the chart above indicates, to mirror the S&P 500, the SPY has to own a representative proportion of individual stocks … like Apple.

So, when Apple stock drops, the SPY goes down commensurately.

Some of the impact of the drop is buffered by the other stocks in the index.

But, since Apple is 3.5% of the SPY portfolio, it’s direct impact is noticeable.

Then there’s the indirect “multi-colinearity” effect of Apple’s close cousins, e.g. Microsoft, Facebook, Amazon, Google … you know the FAANG stocks.

Combine the effects, and the impact on the overall index is, as they say, statistically significant.

So, even though I may not own Apple directly … I own a boatload of it indirectly, so its decline delivered a body blow through the SPY.


P.S.  Many pundits have been pointing out that programmatic algo trading tends to amply the types of steep declines (or rises) that were evidenced yesterday.

I haven’t heard any mention the ‘index fund effect’ … when a stock drops precipitously, the index funds have to rebalance their portfolios.

That means selling the declining stock … which further drives its decline.



Follow on Twitter @KenHoma
>> Latest Posts

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s