(Bloomberg) — Friday was set to be a good day for Apple Inc. shares, with the iPhone maker a big winner in the quarterly restatement of major stock indexes. And for most of the session, that played out — until about 10 minutes before the closing bell.
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By the time the stock ticked over, Apple had already fallen more than 2% from its high of the day and closed in the red. The surprising turnaround has left market observers guessing as to who or what could have caused this.
Market-on-close orders — orders that instruct a broker to buy or sell a stock at the closing price of a trading day — showed an unusually large imbalance at the time, indicating net sales of 30 million shares. That’s more than half of Apple’s average full-day volume over the previous three months, all sold in the final minutes of the Wall Street week.
The massive selling pressure came as a surprise because funds that track major stock benchmarks were expected to be big buyers of the stock on Friday after Warren Buffett sold a significant stake in Apple in the second quarter, meaning the company’s weighting would be significantly increased across many metrics.
One theory is that some actively managed funds may have taken advantage of this predictable liquidity to reduce their investments.
“Maybe some investors wanted to take advantage of the reallocation to sell a significant portion of their holdings,” said Matt Maley, chief market strategist at Miller Tabak + Co. “They knew there was going to be a lot of buying power coming into the market, so they knew it would be a good time for them to sell some of their holdings without taking the stock down too much.”
Although Apple closed down 0.3% on Friday, it was still up 2.6% for the week as a whole. Shares fell as much as 1% on Monday before cutting their losses in half by 12:45 a.m. in New York.
Another possibility is that arbitrage players bought up Apple shares ahead of the rebalancing event, which Piper Sandler & Co. estimated would create $35 billion in demand from passive funds. The stock rose for three straight sessions through Friday, jumping nearly 6% in that time.
Although things are getting busier, buying stocks whose leverage in major indexes is rising and selling stocks whose leverage is falling has proven to be a reliable strategy for many in the hedge fund world.
“Arbitrageurs are trying to position themselves for different index events because they think there will be movement at the close on rebalancing days,” said Mohit Bajaj, managing director of ETFs at WallachBeth Capital. “Although it’s getting harder and harder, it’s still happening.”
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