Apple Fell Victim to Index Funds

NEW YORK (TheStreet) -- Is Tim Cook responsible for your Xanax prescription? How many bottles of Extra-Strength Tums did you go through this month?

Did you know Drugstore.com has a special on the jumbo-sized Alka-Seltzer Original, only $10.99!

Trading can be an emotional roller-coaster, but trading or investing Apple ( AAPL) stock goes beyond emotional and enters into the realm of psychotic. Even people not in the market are getting concerned over the loss of shareholder value and the volatility in Apple's price. Have you ever thought about the spillover effect Apple's decline has had on semiconductor stocks? Some companies are at the brink of closing their doors.

Fortunately the selling appears to have subsided, and Apple may have found a bottom at $390; currently, it's trading about $20 above that low. The day after Apple's earnings call, Apple shares revisited that low, but only briefly. The shares then rebounded to where they are now.

This kind of volatility drives traders and investors mad trying to guess which way the stock will go next. Should they wait, add more, protect gains, get in, get out? There are countless permabull retail traders (little guys) that have been dumbfounded. Many bailed when it got below $400 because they couldn't take it any longer. Now, they're kicking themselves as Apple rebounds.

But it's not Cook's fault. It was really the result of index funds being overloaded with Apple shares, and they rode it all the way to the top, making huge profits. Then some of the bigger funds, along with a swath of insiders, decided to take profits, which is natural, but it manifested into a slippery slope, which caused a cascade of funds to divest, and they kept on divesting.

This was exacerbated by a confluence of things that mainly resulted in confusion and fear. Analysts smelled the fear, and so they jumped into action and used their superior intellect to explain to investors what was happening. And because they are analysts -- hapless, glorified reporters -- they mostly got it wrong, which did nothing but add to the fear, uncertainty and doubt (FUD). At the same time, also sensing an opportunity, Samsung jumped into action with a massive Apple smear campaign, which helped them sell a lot of cheap Galaxy phones and "phablets."

Uncertainty is the principle reason people develop fears, and there was no shortage of that in this saga. Apple itself contributed to it, by just being Apple. That is the company's practice -- keeping mum about future products, particularly when they are about to enter or create a new market. Apple created this communications vacuum, and the unfortunate effect was sleazeballs like Samsung getting sucked in through reverse osmosis.

In this new environment, which is largely "perceived and only tangential to the truth," as Ken Segall, author of Insanely Simple, put it in a talk I had with him the other day, Apple was forced to tip its hand in the absence of new products. So, the company decided a stock-buyback program and dividend boost were the best solution. Now, I can't argue against this move because it solves a lot of problems from an investor point of view.

It increases the value of Apple stock, which creates demand. It positions Apple as a more mature, value-oriented company that will entice index funds to reinvest. It rewards faithful long-term investors and a whole new group of value-oriented investors. It quells the incessant nagging of many analysts that Apple is hoarding cash, and it generally creates a lot of good will.

Well, with this scenario, and with the things Cook said, alluding to big things to come, I couldn't think of a better time to jump in to Apple. It's cheap, and still the best-run company in the world, with the most desirable products, and a whole lot more to come.

Once the vacuum is filled with new products and a reinvigorated ad campaign, Samsung will wither away, and analysts will be able to say I told you so. Investors? They'll be able to chuck the antacid.

-- Written by Ernie Varitimos, author of the Apple Investor blog.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Ernie Varitimos has a long history with Apple as an investor, trader and consumer of its technology. He started his career as a rocket scientist and has spent the past 25 years driving, controlling and influencing technology in the financial industry. Ernie is a former hedge fund manager and current futures trader.

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