Chart of the Week – FAANG

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As October came to a close many thought that the market downturn was behind us and the future was profitable. However, thus far in November we have seen more losses and this can mostly be blamed on declining oil prices, global growth pessimism, and poor performance by the FAANG stocks. This group of FAANG stocks is comprised of Facebook, Apple, Amazon, Netflix, and Google. As five of the biggest market cap’s in the world these stocks significantly influence the overall performance of the market. Their broad coverage of retail, advertising, social media, and cloud computing services reach many different sectors and markets which further enhances the negative affects felt when these stocks are not performing.

The decline for these FAANG stocks was led by the disappointing earnings reports of both Apple and Amazon. Apple reported a top and bottom line increase but they offered poor guidance for the holiday season and a decrease in units sold. They also announced that moving forward they would no longer be disclosing the data regarding how many units were sold. This change scared investors as a decrease in transparency may signal that peak sales had been reached. Another negative that has effected Apple stock lately is the significant decrease in guidance by key Apple suppliers. Both Lumentum Holdings and Qorvo decreased their guidance and blamed it on a “large customer cutting orders”. This can be presumed to be Apple and it further emphasizes the fact that peak sales may be in the review mirror.

Amazon also saw a poor reaction to its earnings report but the effects of the report may not be as long lasting as that of Apple. They crushed earnings and revenue estimates but lowered guidance. This decrease in guidance may be the result of other retailers such as Target offering free 2-day delivery this holiday season in order to compete with Amazon Prime. This quarter should be a good test of just how loyal Amazon customers are. I am willing to guess that many people will be reluctant to switch from Amazon to Target as Amazon is what we have all become used to when it comes to online shopping and those already paying for Amazon Prime have little reason to switch.

I anticipate that the combination of a positive G-20 summit in which trade conflicts with China are tempered and a resurgence of the FAANG stocks is what we need to see before we continue with the bullish trend across all markets that we saw from March to October. I will be following the New Tech and Media ETF (FNG) in order to determine when I feel that FAANG has recovered. FNG is currently trading with the 50-day moving average far below the 200-day moving average. This is a bearish signal and I want to see the 50-day cross over the 200-day before I declare that we are back in a bull market.

A positive G-20 summit could send positive shock waves across the entire market. In particular, Apple could benefit due to the fact that their products, such as the Apple Watch, are suffering from tariffs. These tariffs could explain the decrease in units sold during the previous quarter. A relieving of trade tensions would make Apple products more affordable and simply boost market optimism. A boost in market optimism could be exactly what we need to get rid of the short sellers who are hurting the markets progress.

If for some reason the FAANG stocks are unable to rebound we may be looking at the catalyst for our next recession. It is possible that the struggling FAANG’s are a result of overvaluation amongst stocks that will never be able to profit enough to justify their ridiculously high valuation multiple’s. The recent downturn in FAANG could simply mean that these stocks have peaked and have run out of legs. These never before seen valuation multiples may have come back to bite us and the next recession could be a result of a burst in the FAANG bubble. However, I will wait and track the performance of the FNG ETF before I get too pessimistic in that direction. That being said, we must be aware of possible worst case scenarios and there certainly is a chance that our gold medal stocks which seemed like perfect investments may have run their course and gotten a little overinflated.

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