Nasdaq rebalancing reduces hedge fund manipulation of Apple stock

Friday, February 8th, 2013 By

apple stock

Reducing Apple's weight on the Nasdaq-100 makes Apple shares less vulnerable to rumors spread by hedge funds to manipulate the entire index. Image: CC chrisscott/Flickr

The Nasdaq stock exchange announced Tuesday that it is rebalancing its Nasdaq-100 index next month to correct the outsized influence of Apple, Inc. The Nasdaq rebalancing reduces the weight of Apple stock on the total value of the Nasdaq index by half. Nasdaq’s move will reduce the manipulation of Apple stock by hedge funds and give long-term investors a rare chance to buy Apple stock at a discount.

Nasdaq rebalancing reduces weight of Apple on index

For the past few years, as Apple stock goes, so does the Nasdaq-100. Since the market bottomed out in 2009, the Mac, iPhone and iPad have driven Apple shares skyward more than 250 percent. Since then, Apple’s stock has risen about another 150 percent to represent more than 20 percent of the total value of the Nasdaq-100 index. According to Nasdaq officials, Apple stock has ballooned to more than twice the weight it should have on the index. After Nasdaq rebalancing on May 2, Apple shares will account for a little more than 12 percent of the Nasdaq-100. The adjustment to correct for Apple realigns the ratio for the company’s stock and outstanding shares with the way the Nasdaq-100 is calculated. The change also reduces weighting for 81 other companies. Some Apple rivals will gain. Microsoft will rise from 3.4 percent up to 8.3 percent. Oracle will rise to 6.7 percent, Google will rise to 5.8 percent, and Intel will climb to 4.2 percent.

How hedge funds manipulate the market with Apple rumors

A lower ratio for Apple shares on the Nasdaq-100 should shield the stock from future manipulation by hedge fund traders suspected of shorting Apple and spreading rumors that send the entire Nasdaq-100 down. Jason Schwartz at Seeking Alpha describes a recent instance in which unconfirmed conjecture about Apple based on vague sources subjected Apple stock to irrational price swings. In February, when Apple was trading at $360, hedge fund Yuanta Securities floated a rumor based on “supply chain contacts” that the iPad 2 would be delayed until June. Bloggers spread the rumor, and Yuanta Securities used it to aggressively short Apple shares. In two trading days Apple stock dropped $20. Shortly afterward, Steve Jobs, who was given six weeks to live by bloggers, announced that the iPad would go on sale March 10. Investors who should have known better felt duped, and Yuanta padded its returns. But the chicanery affected the value of the entire Nasdaq-100.

Impact of Apple rumors already diminished

The Nasdaq rebalancing doesn’t take effect until next month, but money managers are already rebalancing their holdings. In pre-market trading Tuesday, Apple stock was down $4.19 to $337 from $341.19 at Monday’s closing. The ability of hedge funds to manipulate the market using Apple already has been diminished. Analysts don’t expect the latest iPhone delay rumors (which would freeze the iPhone market and hurt Apple if they were true) to work because Apple stock remains about $15 below its high and is trending upward again. A window has been opened for average investors and traders to get into Apple shares and the company is expected to exceed expectations again when it reports first quarter earnings this month.

Sources

Fortune

The Mac Observer

MSN Money

Seeking Alpha

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