FAANG Stocks Look Vulnerable

Stocks Fall On Fed Minutes

We’ve all watched stocks react to Fed announcements for years. In the last few months especially, we’ve seen the market fall initially after an announcement and then rally to a new high on the day. Most didn’t bet on it, but some were very confident the market would hit a new high in the last 90 minutes of trading. 

However, after an initial bounce, the stock market fell sharply. It was a fairly large decline from the high on the day even though it wasn’t a big decline in total. From 2:05 PM to the close, the market fell 69 basis points as it was down 0.44% on the day. Just because the S&P 500 barely hit a record high on Tuesday, doesn’t mean this can’t be a double top.

Nasdaq fell 0.57% and the Russell 2000 was up 0.15%. We keep seeing small cap stocks outperforming the Nasdaq this month. The small cap banks rose 0.62% after having a brutal day on Tuesday. It will be interesting to see if Wells Fargo can stay above its 52 week low. It’s at $24.07 now and it’s 52 week low is $22. 

Just because the overall market is overbought doesn’t mean the banks should decline in the next correction. Usually most stocks fall in corrections, but how can the banks fall? They are already in the gutter.

As you can see from the chart above, 95.8% of industry groups are above their 50 day moving average. Only industry below it is energy. Chevron is down 16.3% since its June 8^th high even though cyclicals are near that high.

Biggest Tail Risks

As this wave of COVID-19 cases diminishes, fund managers think of a 2^nd wave as less of a tail risk. As you can see from the chart below, it went from being considered the biggest tail risk by 55% of managers in July to 35% in August. Biggest increase was from the U.S. China trade war which went from 5% to 20%. 

A big question on the trade war is how Biden will handle it. He’s tough on China, but probably has a different plan. On the other hand, if Trump wins, he will likely be more aggressive on China than ever because he won’t be up for election again. According to some polls, Biden currently has a 59% chance of winning. But we must remember the polls were way off in 2016. 

Big Tech Stocks Dominate The Market

FAANG stocks didn’t fall much on Wednesday as Amazon was down 1.6% and Netflix was down 1.5%. They are still vulnerable to a major decline. If Apple were to fall 40%, it would be hard for the Nasdaq to avoid at least a 30% decline. It could end up falling more than it did in the COVID-19 crash. However, the S&P 500 and Russell 2000 should avoid the same fate. 

As you can see from the chart below, TECH+ is up 25.9% this year, while cyclicals and financials are down 12% and 15.2%. Top 5 stocks are up 41.4%, while the rest of the market is down 3.1%. When people wonder how the market is up after the worst recession since the Great Depression, tell them most stocks aren’t up. Big ones have done well enough to cover for the rest.

3 Crazy Nasdaq And Tech Charts

Let's review 3 insane Nasdaq and tech charts which should make you scared of a major crash. There is only an onslaught of these scary charts because this is the 2^nd biggest tech bubble ever. As you can see from the chart below, in the past 3 months, the Nasdaq recently peaked at rising 71% of the time. Since 1985, the highest up percentage was 76%. 

This is tied for 2^nd with 3 other times. In other words, this is the exact percentage of up days prior to the 2000 crash. Nasdaq has either consolidated or crashed after these signals were reached.

Nasdaq is trouncing the S&P 500 by more than in the tech bubble in the late 1990s. As you can see from the chart below, there have been 20 more new highs in the Nasdaq than the S&P 500 this year which is the 4^th highest ever. Specifically, the Nasdaq has had 34 and the S&P 500 has had 14. 

Years with higher net new records by this point in the year were all in the 1980s. It’s possible this changes since the S&P 500 just hit a new record. However, this might be a double top.

Software stocks are too big of a percentage of the S&P 500. They are 9.32% of the index even though they only make up 5.79% of the index’s free cash flow. The biggest 3 stocks in this industry are Microsoft, Adobe, and Salesforce.com. As you can see from the chart below, the S&P 500 tech sector’s price to sales ratio is at 5.8 which is same as it was in December 1999. If that’s the case, we have about 3 months left in this tech rally before it crashes back to earth. 

It's unlikely that the sector or the Nasdaq will crash as much as it did in in the early 2000s. In fact, it might just fall back to the December 2018 low. A catalyst of this decline might be successful phase 3 trials from any of the vaccines being tested now. We can expect those results by the end of this year or early next year.

Conclusion

The stock market fell on the Fed Minutes. Fed can easily accidentally cause the tech stocks to crash because they are so vulnerable. Many people are convinced this isn’t a bubble despite the high valuations. That’s because people have been screaming about a bubble for the past 11 years. 

However, the people screaming about a bubble didn’t have nearly as strong of a case as the bears do now. Above are 3 charts which should make you worried about the FAANG stocks collapsing soon. We can expect this decline to be worse than the COVID-19 one. Investors wrongly think tech stocks are safe and don’t fall. They are risky because they are expensive.