Wednesday, 6 April 2011

"Nasdaq rebalance hits Apple"

Well the headline reads as "Nasdaq rebalance hits Apple" but I am not sure that I understand it entirely.
According to the article ( Nasdaq rebalance hits Apple), the NASDAQ will re-weight its benchmark index on the 2nd May to better match capitalisations.
The effect on Apple being to reduce its weighting (proportion of the index), from 20.49% to 12.33% (Apple will still be the biggest constituent).
In turn, this will prompt a number of "index trackers" to adjust their stock holdings accordingly which in the case of Apple is likely to "technically" push the price down as trackers reduce their holdings to match the new aggregation

The point that I am not clear about is the setting up of the original index weightings! 
My understanding would be to have used market capitalisation to set it up to begin with at which point the capitalisation (no of shares in issue x share price) would automatically adjust within the index as prices change.
I can only think that: share buybacks (adjusting the no. of shares in issue); mergers/takeovers; and changes to the companies making up the index; have been allowed to accumulate the adjustment errors to this point.
The FTSE "appears" to adjust quarterly with companies dropping out and being replaced and extra companies being brought in should a merger/takeover reduce the number of constituents.

Anyway looks like Apple shares might dip in value due to the adjustment (its all about buyers v sellers) but will hopefully recover as the balance of buyers and sellers re-establishes itself. We might even see fresh momentum as a "buying opportunity" presents itself.
I am looking at this as short term noise in the longer term prospects for Apple although, once of a day (in my impetuous youth), I may have viewed this as an opportunity to sell now and buy back post the change but, I think that I will do better to hold and wait. 

On the plus side, other stocks may benefit such as my underperforming holding in Cisco as its weighing will increase from 1.56% to 3.66%.

Apple @ $338.89, - $2.3 (- 0.67%) at close of play 05 April 11

No comments:

Post a Comment