Apple stock is soaring this week, thanks to the artificial intelligence strategy the tech company announced Tuesday. Hedge funds might be helping, too—and both factors can push Apple shares even higher.
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Shares of the smartphone giant are “getting a delayed boost from the [Worldwide Developers Conference] Apple Intelligence launch,” wrote Bear Traps newsletter author Lawrence McDonald in a Wednesday note. “For over a month, people have been discussing the artificial intelligence upside for Apple, starting another supercycle for iPhones.”
Now that optimism is showing up. As of Wednesday, Apple stock had climbed 16% over the past month. That leaves shares up about 13% for the year.
That’s great, but shares of Nvidia, the original AI stock, have gained 38% over the past month and up about 153% in 2024.
Apple stock might be able to narrow the gap because traders are getting out of an old position. McDonald added in his note that a hedge fund has been unwinding a large long Nvidia/short Apple pair trade.
Pairs trades typically involve buying one stock and shorting the other. Shorting a stock means borrowing and selling shares an investor doesn’t own. It’s a bearish bet—the seller pockets the cash from the sale hoping to repurchase shares at a lower price when they return it to the original owner.
The goal of any pair trade is to make money from essentially one idea while eliminating other factors, such as the economy or inflation, that can move both stocks up or down. The long Nvidia/short Apple trade gives, an investor exposure to the AI theme, while removing some of the risks of holding technology stocks.
With Apple back as an AI play, that trade needs to unwind—which means buying Apple and selling Nvidia. How much more unwinding is left to do is hard to say.
The amount of Apple stock sold short relative to the amount available to trade is about 2.3%, according to Bloomberg. That’s high for Apple— and the short covering needed to return things to normal is about 10 to 20 million shares. That could be all done: Apple stock has traded almost 300 million shares over the past three days.
What’s more, in the wake of the recent run, Apple stock is now “overbought”—shares have climbed quickly that the rally may run out of steam. (For what it’s worth, Nvidia shares are even more overbought.)
That isn’t too helpful. Fairlead Strategies founder and market technician Katie Stockton has an idea where Apple stock can trade, though. She says that if Apple can stay above $198 a share in the coming few days, then it will soon trade at $240. Stockton isn’t making a fundamental call on Apple stock; technicians look at charts and patterns to get a sense of where things can go over the short and medium terms.
Stockton’s reasoning implies that there is about 10% upside left in the Apple-as-an-AI-play-rebound trade. Apple shares gained 2.9% on Wednesday, at $213.07 apiece.
Nvidia shares, however, aren’t hurting: shares of the chip maker rose 3.6% on Wednesday, while the Nasdaq Composite was up 1.5%. A slower-than-expected inflation reading is helping most stocks.
A long Apple, short Nvidia trade is one way to capture Apple’s AI rebound. Shorting Nvidia stock doesn’t sound like a great idea, though: it’s easier to hang on to Apple and reevaluate positioning at Stockton’s $240 level.
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