Are investors looking to add shares of Facebook to their portfolios by slicing their Apple holdings?

That’s a question traders and investors have been pondering over the past few weeks, with the market souring on the once-golden Apple (AAPL) as Facebook prepares for its record-setting initial public offering.

“I have seen several hedge-fund-type accounts liquidating various positions to make way for Facebook,” says John Glasmann of Precision Securities, a San Diego firm that specializes in IPOs.  “But I have no firsthand knowledge of this to be factual as it relates to Apple.”

Independent trader Doug Monieson has heard about people selling Apple to buy Facebook shares.  But he says it’s more a function of a portfolio balancing issue related to Facebook’s IPO that may be causing some tech fund managers to sell Apple.  

The Nasdaq is changing the rules for faster inclusion into its flagship Nasdaq 100 Index.  That benchmark is tracked by the PowerShares QQQ Trust (QQQ) -- one of the most actively traded exchange traded funds.

Under the provisions announced April 13th, Facebook could be included in the Nasdaq 100 later this year, leading to a rebalancing of the index’s constituents.  Previously stocks had to wait a year after the IPO before joining the widely watched index of 100 non-financial Nasdaq names.
Linking Facebook into the index may mean less demand for Apple by ETF investors and fund managers who try to mimic the performance of the Nasdaq 100 Index.

Monieson says, “I believe Facebook will be part of the (Nasdaq 100 Index) by the end of the year and Apple’s weighting will be reduced within the index as a result of new large-cap tech companies added (Texas Instruments was recently included) and also a reduction in the market cap weighting of Apple within the index.”

Beyond Facebook, Apple has run into a number of other issues this spring.  Many traders and investors say the company became a victim of its own success.  The stock grew so much larger and so much more quickly than the broader market that at the stock’s peak in early April it nearly accounted for 5% of the S&P 500’s valuation, which is the maximum exposure some fund managers can have to one stock in a portfolio.

Apple even briefly pierced the $600 billion market-cap value, a level only previously attained by Microsoft at its peak in late 1999.

Plus, some analysts have said Apple’s sales and profit growth rates are running into the law of big numbers—they simply can’t continue growing as fast as they have been.

Robbert van Batenburg, head of equity research at Louis Capital Markets, advised clients short the stock when he outlined both the market cap and big number issues in a March 19th report comparing Apple’s recent run and outsized market valuation to Microsoft (MSFT) in 1999, Cisco (CSCO) in 2000, and ExxonMobil (XOM) in 2007.

Van Batenburg says Apple shares are following a similar trajectory to gold’s chart from last summer when the precious metal ran up to record highs, forming a stock chart pattern known as a mountain peak, or blow off top.  That’s what chart watchers call a thrust to new highs which washes out short sellers and contrarians while sucking in the last holdouts who want to buy into a hot momentum investment such as gold or Apple just as it crests.  

After the peak, of course, comes the steep downslide which Apple has experienced, falling more than $100 per share from its record close.

“I don’t think Apple’s glory days are behind it,” says van Batenburg, but he offers a caveat, “I think the path of least resistance for now is down and it may take several months to cleanse the stock from the irrational capital that got in at or near the top.”

Newsletter writer Michael Belkin has been advising hedge and mutual fund clients to sell Apple since his well-timed edition dated April 9th (Apple closed at a record that day and hit an intraday peak the following session before tumbling).  “If ever there was a bubble stock, Apple is it.  The parabolic chart of Apple left the fundamentals behind long ago,” he wrote, adding, “A sharp reversal in Apple’s shares would turn forced buyers into forced sellers and deflate bubble sentiment.  That event should be approaching.”

Belkin says investors may not grasp that the stock could be cut in half and still be in a bullish uptrend.

Cameron Hight, who advises hedge and mutual fund managers on risk management as President of Alpha Theory, reasons, “It seems more difficult (a lower probability) for Apple to double and become a trillion dollar company versus being cut in half.  Technology and consumer tastes are fickle… (Apple) could lose its hold on the technology-consumer vanguard.”

Hight says he is not currently compelled to take a position long or short Apple, so he advises investors “to search on for more compelling risk/rewards,” though he is not a buyer of Facebook.  “I wouldn’t take that risk at this valuation.”

There are still some big bulls on Apple. Noted hedge fund manager David Einhorn of Greenlight Capital has spoken out recently in defense of the company’s growth prospects.  Einhorn gained prominence by flagging the financial problems at Lehman Brothers and famously shorting that stock to 0.  His Greenlight Capital owned nearly 1.5 million shares of the technology giant according to the latest SEC filing.

Tony Ursillo, an analyst at mutual fund company Loomis Sayles which held 350,000 Apple shares as of March 31st, agrees that  there are some “capacity constraints” for fund managers due to Apple’s outsized market cap.  

Ursillo asserts that any forced selling by managers pruning their Apple stakes will be met with demand from new investors who may not have been able to buy the stock previously.  “The current valuation of the stock and the initiation of a dividend should open up Apple to a greater potential pool of money such as income and value funds.”

The stock analyst says the biggest issue now is whether the tech company’s wireless partners put the brakes on iPhone growth by shifting subsidy lifespans and in turn, slowing the adoption cycle of new models.

“The number one issue (for Apple’s stock) is around carrier subsidies for smartphones,” Ursillo contends.  “Carriers are subsidizing them but they can extend contract periods before you can upgrade to a new phone.  If it was an 18 month period, they can incentivize people to upgrade now at 24 months for the full subsidies.”

“As far as Facebook goes,” Ursillo says, “one reality is no single participant in this offering is going to get more than a few basis points of an allocation.  So if anyone intends to build a full position it will be difficult.”