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This Is Your Warning for the “Profit-Taking” That Could Happen in Seven Days

0 | By Shah Gilani

Everybody loves Apple Inc. (AAPL).

Actually, everybody loves everything Apple: the iPhones, Macbooks, iPads, Apple AirPods, the Apple Watches, the whole Apple ecosystem, and especially Apple stock.

Even if you don’t think you own it, you own it if you own any mutual fund(s) or popular index-tracking ETF(s). Apple’s in most of them.

In fact, Apple is so widely held it’s frightening.

Here’s how big an influence Apple stock is on the stock market – the S&P 500, the Dow Jones Industrials Average, the Nasdaq Composite – and what’s frightening about where else Apple resides.

Earnings Influencer

Apple’s fiscal first-quarter earnings, which is the quarter ending December 2019, come out on Tuesday, January 28.

They better be good.

Because the stock has been flying so high, it was up 86% in 2019, any big letdown on earnings, revenues, margins, or out of left field someplace, could rock Apple and the market.

Analysts expect earnings per share to come in at $4.52. That would be 8.1% higher than the $4.18 EPS spit out in the same quarter a year ago. That would also be 50% higher on a sequential-quarter basis.

Revenue is expected to be $64 billion for the quarter, up 2% from a year ago. That’d be another record for fiscal Q1 revenue.

Investors are going to be keying in on services, wearables, iPad sales, and prospects for Apple TV+.

Of course, iPhone sales will be up there too, but analysts believe Apple’s becoming better-rounded and – they hope – less reliant on outsized revenue coming from just phone sales.

The numbers better be good for the sake of analysts who’ve just upgraded Apple stock and are looking for it to get to $350, $375, $400, and even $450 on the high end.

So, What If Earnings Miss?

The problem for the market, meaning the benchmark barometers, is that Apple is a huge chunk of all those indexes.

Its lowest weighting is in the S&P 500, where it is 4.84% of that index’s capitalization weightings.

In the price-weighted Dow, Apple accounts for 7.3% of the index.

Apple’s weighting in the Nasdaq Composite, the index that counts all Nasdaq listed stocks, is 6.25%.

And in the Nasdaq 100, the index of the 100 biggest non-financial stocks listed on the Nasdaq, Apple represents about 12%.

But that’s not all.

In addition to Apple being such a big part of the major market benchmarks, Apple stock is held widely by actively- and passively-managed mutual funds and resides, in big size, in 202 ETFs.

As far as the indexes go, when stocks go up and down the benchmarks are re-valued constantly during the day to reflect price changes. The same thing is true for ETFs and mutual funds; only mutual funds are priced at the close of trading.

There’s also buying and selling of mutual funds and ETFs. And that has an impact on the indexes.

So-called passive investment funds that track benchmark indexes and sub-indexes and all manner of more “focused” indexes have become all the rage, attracting more than $4.5 trillion.

As investors buy and sell passive investment funds, which are mostly ETFs, the “authorized participants” that construct the units that make up shares of ETF funds have to buy all the shares in all the stocks that underly the ETFs. And they have to buy them in the same weightings as they are in the indexes they track.

With as much weight Apple has in all the major market benchmarks it’s in, and how much it’s weight accounts for in all the ETFs that track those benchmarks and all the sub-index and other ETF funds Apple resides in, any adverse move in Apple’s share price could upset the entire market if owners of those funds change from passive to active sellers.

Yes, everybody loves Apple. Until they don’t.

If Apple’s earnings are a bust this quarter, look out below, the market could be in for a round of “profit-taking.”

I’ll be following the situation closely and will let you know if anything needs your immediate attention.

Until then, you’ve been warned.

Sincerely,


Shah

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