FANG Stocks take a beating. Last time this happened the market crashed. Weekly stock market update.


FANG Stocks take a beating – Weekly stock market update

This week was a trifecta of risk events, all of which occurred on Super Thursday.

You had the James Comey testimony, the ECB press conference and a UK election to deal with.

However, the biggest event of the week happened on Friday, and most traders did not even realize the massive implications.  I will talk about this in the second part of our weekly update.

I also covered all of these events in great detail in the FREE stock market morning updates on YouTube.

You can catch these updates daily at 9AM EST by subscribing to our YouTube channel.

 

European Central Bank

The ECB left the interest rates unchanged.  Mario Draghi revised the outlook of the economy from downside risk to “balanced”.  The ECB also removed the language that signified there could be lower rates in the future if the economy deteriorated.  This was perceived as tightening.

The ECB revised the economic outlook upward for 2017 to 2019.  Inflation expectations increased to a great extent.  The stock market had priced all of this into a strong Euro market, which led to an unwind of the long trade.  There was volatility through the conference but a trend did not prevail.

 

James Comey Testifies

Donald Trump did not interfere personally with the election in collusion with Russia.  No votes were altered in the 2016 election.  Loretta Lynch, attorney general under Obama, told James Comey not to call the Clinton emails an investigation.  She told him to call it a matter.  Hillary Clinton was then released of wrong doing the following day.

James Comey leaked a lot of information personally.

Donald Trump said he would openly testify under oath.  Trump also made reference to an existence of tapes of their conversation.   I am certain there will be more anxiety over this issue with little development in the coming weeks.

Trump will not be impeached.  The testimony did more damage to Democrats than anything else.

UK Election Results

Theresa May gambled by calling a snap election 7 weeks ago with the goal of gaining a majority government.  May’s intention was to increase her bargaining power for the upcoming Brexit negotiations.  The problem is that May went on to run a weak campaign leading into the election.

The result was losing seats and the gamble did not pay off.  Many people were under the impression May would resign. She announced in the morning that she would continue in her role, but work with the DUP party to form a coalition government.

The British pound sold off on news of a hung election and the odds of a hard Brexit decreased.  The Brexit negotiations officially start in less than 10 days.

 

On Friday the single largest risk event began while traders were busy digesting the Super Thursday narratives.

FANG Stocks take a beating!

On Friday FANG stocks flash crashed as much as 6.6% before recovering some of the loss to close down over 3.5%.

While there is nothing wrong with a little selling, the problem is more serious if you look under the surface.

 

FANG Stocks Index – Facebook, Apple, Amazon, Netflix and Google. (Daily Chart)

The fact is that FANG stocks (with an extra A – FAANG) and MSFT collectively represent just 13.2% of the SP500 index.

However, these same stocks account for 40% of the YTD performance in the index!

The problem is that while the overall SP500 index holds on to gains near record highs, the core stocks responsible for a lot of the gains have slumped on Friday.

Overall, investors pulled out over $716 million from the XLK tech sector ETF.  This is the largest outflow of assets in over a year.

The last time this occurred was in 2001, just weeks before the technology bubble collapsed onto itself.

While this occurrence in itself is not a reason to panic, I believe a warning shot has been fired.  You cannot ignore this event as a trader and have to take action to position yourself for what comes next.

FANG Stocks Collapse – What next?

I will be watching the FANG stocks index very closely this coming week to find out if this little flash crash was a one off or the start of something bigger.

Keep an eye out for the Nasdaq and how it performs in correlation to SP500 stocks.

The Nasdaq actively outperformed the larger SP500 on the way up, and I believe it will collapse to a larger extent on the way down.

Institutional Money is Long a lot of FANG Stocks

Hedge funds have poured a large portion of their assets in a small basket of companies, which are the FANG stocks.

I have always said that it is very easy to accumulate a massive long position, but it is much harder to get out of it.

Someone is always willing to sell you an asset, at the right place.

It is much harder to find buyers.  On the way down, bids get pulled and asset prices collapse very quickly.

Liquidity can evaporate in mere moments, while buying optimism takes time to build.

One of my favorite sayings come to mind in this scenario, “stocks take the stairs up and the escalator down”.

 

Protect yourself and be prepared to convert from a bull to a bear in the upcoming months.

I am not certain that the collapse starts today, but the warning shot has been fired by FANG stocks this week and you cannot afford to ignore it.

The market is also running into headwinds from a seasonal perspective.  Click here to read about stock market seasonality and how it works.

 

Join us for market analysis LIVE this week and find out how to trade the transition.

Have a great trading week.

 

This Sunday we talk about the big Federal Reserve meeting this Wednesday and what implications it has for the stock market.

Sign up for our Options PRO package or Day Trader PRO package and join us for this exclusive analysis.

 

 


The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.