What is Going on With Apple?

Unless you have been living under a rock for the past five months, you are probably aware of the steep decline in Apple’s (NASDAQ:AAPL) share price. Shares continue to trade around 11-month lows and the stock was most recently trading down around 2 percent to $445 on Monday. The catalyst for the latest move lower was the company’s first-quarter earnings results. While Apple’s earnings per share were slightly ahead of estimates, the company’s revenues came up short of Wall Street expectations. Even more concerning, Apple provided second-quarter sales guidance which was below current consensus estimates. Lower-than-expected iPhone sales and falling margins were responsible for the disappointment.

The gravity of the Apple story as it relates to the broader stock market may not be readily understood by the casual observer. The growth of this company, however, has been a major catalyst for the entire market. Similarly, the recent plunge in the share price has far reaching implications. Due to its massive market capitalization, Apple’s performance has a significant impact on the performance of weighted averages. For example, the stock is the largest component of the Nasdaq 100 and accounts for a substantial portion of the entire Nasdaq Composite.

This means that when Apple does poorly, it weighs down the performance of the Nasdaq 100, which is tracked by the heavily traded PowerShares QQQ Trust ETF (NASDAQ:QQQ), the entire Nasdaq Composite, and a host of other ETFs and market averages. Although the broader stock market has continued to climb despite Apple’s swoon, one has to wonder whether the decline is foreshadowing a pullback in the major averages.

Over the last 6 months, AAPL has lost around 28 percent compared to a roughly 1.5 percent gain for the QQQ.  The entire Nasdaq Composite rose around 6 percent during the same time period. On the 3 month chart, the stock is down around 23 percent versus a gain of better than 2 percent for the QQQ and more than 5 percent for the Nasdaq Composite. While the gains for the tech-heavy Nasdaq have been very solid, they would have been considerably better if Apple hadn’t tanked.

Furthermore, the effects on the entire stock market are not just limited to Apple’s large weighting in various market averages and ETFs. An entire corporate ecosystem has developed in Apple’s wake with many suppliers being heavily reliant on the company. For example, Apple was responsible for an estimated 9.3 percent of global semiconductor purchases in 2012. Slowing growth at the company will likely have a ripple effect on Apple suppliers and could negatively effect the entire tech sector. Certainly, the plunge in the stock price has already hurt overall sentiment in technology stocks.

It also is likely having an impact on money flows. Large stock traders and option traders who are experiencing heavy losses in Apple may be forced to sell other positions in order to reduce risk. They may also be less inclined to buy other stocks because of evaporating profits or snowballing losses in Apple. The potential consequences of this should not be overlooked. Apple is the most widely owned stock by hedge funds, many of which have very large positions in the name. While Apple’s fall has not yet had a severely negative effect on the entire stock market, it may only be a matter of time if it continues. At the very least, traders and investors should continue to track developments at the company and consider the implications for the investment landscape as a whole.

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