February's Big Rally, VIX's Big Drop, and More

Apple's (AAPL) massive market cap makes for some odious -- and useless -- comparisons

Feb 27, 2015 at 8:41 AM
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Some week we just had in the markets. First we had Yellen talking to the Senate, followed by Yellen talking to Congress, followed by … actually, it was a pretty slow news week. Which makes it perfect for a Random Thoughts Friday!

The market is up about 6% in February. Beware of any analyst pointing out that it's an unsustainable pace. That's because it's a fairly obvious point, about as insightful as saying "volatility will rise." If we rallied 6% every month, the market would double in a calendar year (remember the old Rule of 72?). Of course, it's not happening. But hey, it makes for an impressive month, especially since it's only 28 days.

The CBOE Volatility Index (VIX) has dropped 34% in February. That's a record for a calendar month as per Callie Bost of Bloomberg. So, what does it mean going forward?

I'll get back to you on that, perhaps as soon as Monday (teaser alert). I will say this before going into the numbers -- calendar months are arbitrary endpoints by definition, so the results could get a little funky. But by and large, big VIX drops don't predict all that much. It's modestly bullish on the "train in motion stays in motion" theory. Panic tends to resolve itself relatively quickly (2008 not included). Complacency often lingers.

Opinions on Fed action are valuable in the context of "if Fed does 'X,' the market should move 'Y'." They're not valuable in the context of "the Fed should do 'X'." To me, that makes the pundit sound like either a concern troll ("what about the children?"), or someone just talking their book. As in, "I'm positioned for 'X,' so that's what they should do." Unfortunately most of the commentary involves the non-value-added variety.

Speaking of which, I believe very few parse every last Fed shrug and comma and whatever, compared to what the media would have us believe. You have to pay attention, because at times it does beget some serious moves. But at the end of the day, they're going to react to the basic facts on the ground.

Also, ignore comps of the market cap of Apple Inc. (NASDAQ:AAPL) to … whatever. We've had these comps all the way up, as in "I can't believe AAPL is worth as much as these 472 countries combined, plus the entire NFL." And before AAPL, it was Exxon, and Microsoft, and GE, and IBM, and I'm sure others. It really doesn't mean anything as far as future market prognostication is concerned. AAPL is literally worth what the market is willing to pay for it. I'm no fundamentalist, but I do know it's not priced like a 1999 internet startup.

It will top someday … hey, maybe it already happened! But it's not going to cause a market implosion simply because of the percent of a given index it comprises. If AAPL drops 10% tomorrow, in and of itself that causes a 1% drop in the Nazz. And that assumes every seller just simply takes the cash from the sale and puts it into something other than just another stock. An indexer actually has to reallocate into other stocks now that they have greater weight. And incidentally, as AAPL dips, it comprises less of a percentage of a given index, and thus causes less of a ripple. Rinse and repeat. Worry about your investment in AAPL if you think the share price is too rich; don't worry at all about the market cap. That's my humble opinion.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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