The FAANG Trade Starts to Crack
Key Points
- One of the most popular trades in the stock market is showing signs of weakness.
- Luckily, the damage should be contained within the weak stocks.
- Investors should keep an eye on the tech sector.
What is FAANG?
Facebook, Amazon, Apple, Netflix, and Google – the FAANG stocks. Many investors see these stocks as a proxy of the overall stock market. Prior to the recent earnings, these companies were worth about $3.5 trillion. The S&P 500 has a total market capitalization of $23 trillion, so FAANG makes up an eighth of the index.
These stocks became famous in 2015/2016. During this time, the S&P 500 and other major stock indices were volatile. However, while many stocks were falling, the FAANG stocks were supporting the markets. These stocks helped prevent further losses in the major indices.
Since, this group of stocks have become famous. The FAANG trade has been a great buy over the last several years, and since, the trade has become very crowded. “The five stocks together have been the most crowded trade for the past six months, according to a Bank of America Merrill Lynch survey of institutional investors in July.” (Source)
Right now, only a couple companies are showing signs of weakness, mainly Facebook and Netflix. In this blog, we will analyze FAANG, and determine whether the stocks are still an important asset to the stock market and what they are saying about the economy.
Apple
Apple (AAPL) is the largest company but it has not reported 2nd quarter earnings. We will start with them.
AAPL has been in a channel since it gapped a resistance around $127. Since the breakout, the stock has moved from $127 to Friday’s close of $190.98, a rise of nearly 50%.
The stock is currently sitting near the top of the channel. The important price zones are outside of the channel. When earnings are released, we will want to watch for the price to break below or above the channel. A buy signal would occur upon an upwards breakout. A sell signal would occur if the stock breaks below the channel support line. Because the sell signal is so far away, now may not be a great time to open a position.
With Apple currently sitting at a $938 billion market capitalization, it is really close to becoming the first trillion dollar company. A good earnings report could propel the stock to the history making valuation.
Amazon
Next in market capitalization is Amazon (AMZN). After a good earnings report, the stock moved slightly upwards. Other market forces likely played a role as the NASDAQ Composite fell more than 1.4% on Friday.
The stock has been in an uptrend since it bottomed in 2001, after the dot com bubble popped. Over the last 17 years the stock has moved from $6 to $1,817.27 on Friday’s close. This long term uptrend has been impressive as the stock has gained 30,187% over these 17 years.
The stock has recently broke a minor resistance at $1,600, and it seems poised to continue climbing. Right now, the important levels to look out for are the $1,600 support, and the green dashed uptrend line. A break of either of these would be a sell signal.
While the stock has performed very well, there is a risk that it is a bubble. The stock has an extremely high P/E ratio, greater the 225. The stock is priced rather high, and it is because so many investors believe this is the company of the future. The problem is that there are going to be more economic hardships before it gets to that point, so pricing the stock so high may be a mistake. At this point, it may be best to wait for a large downturn in the stock, before buying it at these elevated levels.
Alphabet
The third largest company is Alphabet (Google, GOOGL). The company has become what investors imagine Amazon can become. It has changed the way every person interacts within society, and the world. It has shaped the internet into what it is today, and continues to be a driver of innovation and technology.
The stock has essentially been in an uptrend since its IPO, only taking a minor dip during the Financial Crisis. Compared to Amazon, the company is a much better value. The P/E ratio is 53, which is still high, but investors are still expecting future earnings growth.
The stock has been in a minor channel for the last three years, and is currently sitting at the top of it. In addition, the MACD and RSI are also sitting at elevated levels, so the stock could be ready to sell off soon.
However, the stock and company earnings still look bullish, so the stock is likely to remain within the channel. Given the current status of the stock, it may be best to wait until the stock falls back towards the bottom of the channel, before purchasing.
Facebook comes in fourth, in terms of market capitalization. After the company released earnings on Wednesday, the stock fell around 20% losing nearly $120 billion in market value. This was the largest drop of market cap. value in a single day, in U.S. stock market history.
After the giant drop, the stock may be sitting at a good place to buy. The 20% drop brought the stock down to its uptrend line, or the bottom of the channel.
This is a great place to buy because the sell signal is close by. So, if you believe the company and stock can make a comeback, this is a great place to add the stock to your portfolio. Your stop should be placed just below the trend line.
Before you buy though, you will want to be believe the stock can indeed make a comeback. Continual selling pressure could continue to scare other investors into selling their positions, so the stock could remain volatile.
After seeing the results of Twitter, the social media space could be wavering, and these companies may not be as strong as investors once thought.
Netflix
Lastly, we look at Netflix (NFLX). The stock was the first of the FAANGs to release earnings, and it was disappointing. Many investors feared that it could be a sign of a spillover, and the rest of the FAANG members could see weakness as well.
The stock has fallen more than 11% since it released earnings on July 16th. The stock recently broke above an upward sloping resistance line, at the beginning of 2018.
This line has now turned into a support. If the stock continues to fall, the support level could become important. Investors should look to open a position closer to that support line because the sell signal should be placed just below it.
What Happened to Facebook and Netflix?
Netflix and Facebook left investors disappointed after their earnings reports. In Netflix’s case, they aren’t gaining the amount of subscribers investors want to see.
Netflix has a lot of costs associated with the company. Producing their own content and scaling the business across the world is extremely expensive, so investors wanted to see high subscriber growth to combat against those costs.
Facebook on the other hand, lost revenue from a lack of ad sales. It seems that the recent changes in European Union law, and the recent data scandal with Data Analytica have had large affects on the company. Also, both companies project weaker growth in the coming quarters.
Is the Economy at Fault?
So are the issues of Netflix and Facebook tied to the economy? Facebook’s worries are likely to be contained within Facebook. While new laws and regulations are hurting the company right now, eventually the company is likely to comeback.
With 2 billion users across the globe, companies are going to want to advertise on their platform. Once Facebook can bring the level of security it requires, and users begin to trust them again, advertisers will start to use the company again. If it were truly a sign of economic weakness, then Alphabet (Google) would have shown weak advertising earnings as well.
Netflix may be a little different. Investors were upset because they missed subscriber growth targets. This could be due to the economic slow downs across the globe, relative to the U.S. economy. International economies are weaker than many people thought in 2017, and that could be a reason subscriber growth weakened the last quarter.
Is the Stock Market in Jeopardy?
First, only two out of five stocks are hurting. Plus, they are the smallest stocks, in terms of market capitalization. Neither stock is positioned badly, and it wouldn’t be a surprise if they started to move up again.
Secondly, the market relies on these stocks a lot less now. Index breadth is high. More than 64% of the Nasdaq 100 is above their 50-day moving averages while the S&P 500 is at 67% and the Dow Jones Industrial Average is at 87%. The stock market is much more robust compared to the time when FAANG was a major support.
Investors do need to pay attention to the crowded technology sector however. While the sector has been a great performer, we are starting to see not all companies can keep up with Wall Street expectations.
A crowded trade means that prices can move swiftly. It may not be a bad idea to loosen some exposure to the sector while some stocks are at all-time highs.
Conclusion
FAANG has become a household name to most investors because of their stellar performance over the last few years. But, the trade has become crowded as these stocks have become some of the highest holdings in institutional portfolios.
Now, we are starting to see some cracks in the stock group as Facebook and Netflix missed earnings. The two smallest stocks of the group have had their stocks punished, causing an 11% drop in Netflix stock, and the single largest loss of market capitalization in U.S. stock market history, in Facebook.
Even though these stocks have struggled over the last few days, they are still bullishly positioned on the charts. In fact, at this point, all of the FAANG stocks still look poised to grow. However, this changes if the stocks cross any of the sell points previously mentioned.
The missed earnings reports are also likely to remain contained within the stocks themselves. Facebook had the data scandal to deal with, and Netflix is spending more and more money on content, and failing to gain as many subscribers as expected. If these companies hiccuped because of the economy, we would have likely seen it in Amazon and Alphabet (Google) shares as well.
Lastly, the overall health of the stock market is not in jeopardy either. There are still plenty of stocks marching the indices higher. Plus, the two smallest FAANG companies are showing weakness. The net drag that they have on the indices is minimal relative to the other companies within FAANG. Right now, Facebook and Netflix are not likely to change the direction of the stock market.
To see all of the charts visit https://www.brtechnicals.com/faang-is-weakening-should-investors-worry/
Submitted July 30, 2018 at 05:48PM by BR-Technicals https://ift.tt/2Lz05eC
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