Dear Reader,
Not every investor is going to be familiar with the acronym FAANG – which stands for Facebook, Apple, Amazon, Netflix, and Alphabet’s Google – but pretty much everyone knows the component companies and their stocks. If you have any stake in the markets at all, you need to have a full understanding of how just this handful of names has single-handedly brought the market to all-time highs again and again.
It’s not the type of thing that market bulls want to see: a few stocks, all in the same sector, holding up an otherwise fragile U.S. equities market. Breadth is not this bull market’s strong point, to say the least, and if the FAANG stocks correct, the entire stock market could capitulate.
This isn’t the first time we’ve seen a smaller number of stocks leading the broader market. There’s a historical precedent in the so-called Nifty Fifty, which included 50 well-known large-cap stocks on the New York Stock Exchange. These 50 stocks became very popular among investors in the 1960s and 1970s, and they seemed to be invincible as leaders of the U.S. stock market.
1973 was the year that marked the top for the Nifty Fifty, and the rest of the 1970s felt like a bad dream as the nation’s economy fell into a deep, persistent bear market. The problem was that the stocks in the Nifty Fifty had high price-to-earnings ratios: they were overvalued and needed to come back to Earth.
They did come back to Earth, and just as they had dragged the broader markets up, they were the ones to drag it right back down. It’s been said that the bigger they are, the harder they fall, and the Nifty Fifty provided investors with a hard life lesson about what can ensue when a small number of high flyers are supporting the entire stock market.
If all of this sounds familiar, then you’re probably thinking what I’m thinking: the FAANG stocks could be the next Nifty Fifty. We have all the pieces of the puzzle in place, as high price-to-earnings ratios are included not only in the FAANGs, but in the entire tech sector:
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The NASDAQ, which includes 100 U.S. technology stocks, sticks out like a sore thumb among U.S. and world market indexes. Indeed, it makes the S&P 500 look like a bargain. And that’s a comparatively diverse array of 100 stocks – much broader than the mere five stocks covered in the FAANG category.
How have these five stocks impacted the market as a whole? They’re essentially bellwethers: leaders that indicate a trend or direction. Investors, news outlets, and analysts look to Facebook, Apple, Amazon, Netflix, and Google for confirmation that the market is strong and trending upwards.
But the market and the U.S. economy aren’t just about how tech is doing, and they’re definitely not based only on how well Apple’s latest gadget is selling, how many subscribers Netflix has, or how much advertising space Facebook is selling. There are many other sectors that are equally or more important: industrials, consumer staples, retail, energy, utilities…
Much like the Nifty Fifty topped out in 1973, it appears that a topping process may be forming in today’s frothy tech stocks. All five FAANG stocks are showing a similar pattern with a relentless, multi-year march upwards, followed by highly volatile, choppy price action that should concern any tech sector investor:
I’m using Facebook stock as an example because the other FAANG stocks have presented similar patterns. Some might say that there’s a “double top” formation in the works, but what I’m mostly seeing is shakiness after years of calm – not a sign of a stable market.
This could easily be a rehash of the Dotcom bubble of the late 1990s and early 2000s, which ended with a crash in the markets and an even deeper crash among the tech stocks with the highest price-to-earnings ratios. Many new investors, including legions of enthusiastic millennials who love tech stocks, might not be old enough to remember the terrible ending to the Dotcom bubble.
That’s the problem here: markets and investors tend to have short memories or simply weren’t around during the worst of times. A small handful of stocks in one sector shouldn’t control market sentiment, but that’s the situation we’ve found ourselves in. When the mighty FAANG does fall, your positions should be light and your actions nimble in these highly uncertain markets.
It should be noted that precious metals are starting to see a stealth rise and we are seeing the markets converge here. My job will be to analyze the markets as they converge and monitor the trends in a way to optimizes our actions accordingly.
Prosperous Regards,
Kenneth Ameduri
Chief Editor, CrushTheStreet.com
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