- Apple recently saw its market value grow to exceed a 4% weighting in the benchmark S&P 500.
- Microsoft has already been a member of the “4% Club” for months. The last time two stocks were simultaneously above that threshold was in March 2000, when the dot-com crash first started.
- Phil Segner, research analyst at the Leuthold Group, sees this occurrence portending an ominous future for tech stocks, particularly Apple.
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If you’ve been lucky enough own shares of Apple this year, you’re currently enjoying year-to-date returns in excess of 65%. That’s no small order, and should be cause for celebration.
But not all are so keen on Apple’s incredible 2019 performance.
Phil Segner, research analyst at the Leuthold Group, thinks Apple’s sheer size relative to the rest of the market is cause for concern — and a possible sell signal for the stock.
It all starts with a key threshold that Apple just eclipsed, which Segner calls the “4% Club.” It marks the threshold where a single stock accounts for more than 4% of the entire S&P 500 index. As it stands right now, both Apple and Microsoft are members. That’s fairly unprecedented.
“This marks the first time since March of 2000 that more than one firm has occupied the Club — when Cisco, General Electric, and Microsoft all claimed more than 4% of the S&P 500,” Segner wrote in a recent client note.
If March 2000 rings any bells, that’s because it’s the month that the dot-com collapse commenced in earnest. It’s an ominous period for comparison, especially since two of the three 4% Club members back then were tech firms, just like they are today.
The chart below shows just how rare it’s been for a company to eclipse a 4% weighting in the S&P 500 over the past three decades. It also reflects how difficult it is to stay in such rarefied air.
This is hardly Apple’s first go-round in the 4% Club. In fact, it’s the sixth time it’s crossed the threshold.
For Apple specifically, the 4% Club has been a negative indicator of returns to come. In four of five prior occasions, it’s fallen at least 4.9% in the following 12 months. On average, across all five instances, it’s dropped 2.3% over the period while trailing to S&P 500 by roughly 9%.
This is reflected in the table below:
This historical data would certainly suggest Apple could be in for a rocky road ahead, especially after having just reached a record high this past week. And given Apple’s immense reach across the tech sector — whether it’s the semiconductor makers that make its chips, to competitors whose stocks trade in lockstep — any weakness for the tech giant is bad news for the whole industry.
“With history as a guide, its most recent climb into the 4% Club looks like another selling opportunity,” Segner said.
Going beyond tech, the sheer fact that two stocks are making up a nearly unprecedented portion of the S&P 500 is a potentially negative indicator for the broader market. It’s something that boils down to a concept called market breadth, which measures how many stocks are advancing versus the number declining.
When it comes to breadth, the thinking is straightforward: When fewer stocks are doing the lifting, that’s a bearish signal for the market.
So while there’s no denying Apple, Microsoft, and other mega-cap tech titans have driven incredible performance over the past 10 years, heavy weightings for such stocks work in both directions, and can exacerbate a sell-off.