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Apple Slingshot: Making Sense of the Apparently Irrational

Suppose you were a mutual fund manager and your strategic models allowed for a maximum 8% allocation in any individual stock. What would have happened to your Apple holdings in 2012?

As of Sept. 21, Apple was up 74.9% year-to-date. Apple allocations at the largest mutual funds had grown to between 13% and 15% of total holdings with the fiscal year-end approaching on Oct. 31. Because of Apple's strength, because it was such an outlier when compared to the rest of the market, these money managers were forced to re-balance their portfolios in order to comply with their risk models.

The Apple slingshots, or in other words, the deeper-than-expected selloffs, are caused by systematic institutional re-balancing. This is the unintended consequence of Apple's status as the most widely held stock of most hedge funds, indices, pension funds and mutual funds.

Apple's slingshot selloffs occur because of its strength, not because of its weakness. Apple is an outlier.

As you contemplate your mortality as an investor with Apple in the low $500's, solace will replace your frustration when you realize that those institutional funds who sold Apple back to 8% portfolio allocations are now underweight Apple because of the fiscal cliff selloff pressure that Apple has endured since Oct. 31.

Because the fiscal cliff selloff occurred at the end of institutional re-balancing, it has caused this particular selloff to be especially deep. However, as confidence grows that the fiscal cliff will be resolved, Apple finds itself in a favorable supply/demand stock scenario for the first time since July 26.

The next run is coming and it the stock will skyrocket just as it has during the last 10 slingshots because every money manager on Wall Street trusts Apple's fundamental growth story and they know that maxing out Apple allocations is key to outperforming their index.

This slingshot phenomenon will continue to play itself out for as long as Apple occupies the pole position as market leader.

At the time of publication, the author was long AAPL.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Jason Schwarz is an option strategist for Lone Peak Asset Management in Westlake Village, Calif. He is also the founder of the popular investment newsletter available at Over the past few years, Schwarz has gained acclaim for his market calls on the price of oil, Bank of America, Apple, E*Trade, and his precision investing in S&P 500 option LEAPS. His book, The Alpha Hunter, is set to be released by McGraw Hill in December 2009.
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