In late 2017, I kept warning readers of this blog that the unprecedented low volatility, the obscene growth of the FAANG (FB, AAPL, AMZN, NFLX, GOOGL) stocks, and the length of time since a correction or consolidation were all signs of a likely slowdown. In fact, I wrote a blog on halloween that year outlining why the market looked so “scary” This, when everyone else was irrationally exuberant about the market. Every once in a while I get something right…the market effectively topped in early 2018 – and has only put in marginally higher highs (effectively a sideways market) since then. More importantly, my thesis on the FAANGs has proven to be accurate.
In May of this year, I reiterated my conviction that the FAANG’s would be under pressure. Today, we see AMZN opening lower on a disappointing quarter. But that’s just part of the story. The stock has been under pressure since early 2018, per my earlier convictions. Currently, support at $1700 is being tested. You dont want to see that break for more than 3 days or so. If it does, we’ll likely see another hundred dollars on the downside.
Below are the charts of Facebook and Netflix. Not too bullish looking, are they?
Google, on the other hand, doesn’t look so bad. But you really want to watch their earnings reports. Any sign of weakness, and they’ll play catchup with the other guys. An upside breakout through $1275 might prove bullish.
Apple, which is sometimes given “honorary FANG membership”(adding another “A” to the acronym) is the one bullish chart of the group. The recent breakout above $230 proves the difference. Of all of the FAANG stocks, this is the one I’d be most bullish on. Any pullback to $230 might be a good opportunity to enter the stock – assuming that pullback isnt due to a poor fundamentals.
Conclusion
Two messages come out of the FAANG problems. First, it is typical for a market to be in its final bull stage when one group moves almost parabolically – creating a narrow leadership within a rising market. This was the case in 2017. Next, when we see a rotation out of that overbought group (such as in 2000 during the tech bubble or in 2008 when oil was all the rage) this may lead into a corrective period. Which, in this case, it has. The market has been in a consolidation phase for a year.
Will the weakness in the FAANGs (AAPL and GOGGL aside) lead into a bear market? Recall that weakness in the market leaders in 2000 and 2008 changed the market direction (let alone the era of the nifty fifty stocks of the 1960’s that led into the sideways markets of the 1970’s). That is to be seen.
Ask me Anything
Its that time again.
As I have done a few times in the past, I’d like to open the floor to my readers to “Ask me anything” on the subject of investing, risk management, portfolio management and technical analysis. I’m good with broad-sector questions, questions about various international markets, or questions about individual commodities. Also happy to address and asses the potential of asset classes like bonds.
This time, you can even ask fundamental analysis questions, and I’ll get Craig Aucoin (resident CFA for ValueTrend) to inject his two cents worth. Please don’t ask about individual stocks as I’m trying to keep the questions interesting to most readers. The exception might be in massively followed stocks like the FAANG’s. Better to ask about sectors, world markets, asset classes, etc. For example: Cannabis, gold, European markets, the tech sector, etc. Or you might just have questions on technical/fundamental analysis rules, etc.
You can ask as simple a question as you wish. Trust me – there is no dumb question, and I will assure you that others may be afraid to ask the very question you poise. But feel free to ask the hard stuff too! I’ll do my best to get as many questions covered as I can. Post them below, and I’ll get to them by the end of next week. Cutoff for questions is Wednesday Oct 30th.
12 Comments
Per your comments the market has been consolidating now for about 2 years. This period seems to be at the end of what has been a bull market. Do you anticipate this consolidation to continue until the market collapses as we enter into a recession or do you expect one final breakout moment before the collapse happens. I am assuming a collapse will occur given recessions have occurred about once every 10 years historically, along with a resulting and substantial market reset.
Allan
I can summarize our outlook and strategy in two strategic points:
-Yes, the NA markets (US in particular) are overcooked. Our view is for one last pop as the various trade deals (China mostly) resolve. That, plus the initial campaign pop (historically the final electoral year is good in the first half) –these indicate that a potential final rally will probably last into the spring of 2020. We plan on riding the train for that last pop, but have a happy sell finger when the trend breaks (weekly chart trend and 200 day SMA).
-Thereafter, we do expect softness on NA markets as USA ENTERS recession. We expect tons of strength overseas–particularly as Europe EXITS recession. Opposite economic cycles between the US and Europe, we think. Brexit will resolve. China trade will resolve. We are stepping into Europe and have some China exposure too. We have 4 other emerging market plays we are watching for technical breakouts. Europe is likely going to see inflow as money vacates the USA. They are stimulating after several years of uncertainty. Remember what happened when the US stimulated to get themselves out of recession? Yup– big bull market! We are playing that potential, one step at a time.
I may add this to my “ASK ME” blog next week–but thought I could give you the highlights here. Hope it helps.
What is your technical analysis of ZWP.TO ie good old Europe?
I’ll look at that for the ASK ME blog–thanks–it ties into Allan’s question
Thanks Keith, What about MSFT? It’s good, but not thriving. It seems to knocked around with the FANGS because of ETFs. Can you lend some wisdom on this?
Are annual gov deficits inflationary ? If so is the effect moderated by increasing GDP and magnified by a decreasing GDP in a recession?
Al–Another question that should be directed to an economist–but thanks for posting it. Perhaps somebody else can post their thoughts?
Usually seasonality dictates we begin to buy back into stocks in Nov for a run into spring. Do you believe that is the case and we’ve “bottomed” or do you expect more downside before the year is out? We had a big correction in the S&P into the beginning of Oct. but now it looks like we may break out to all time highs once again. Though on low volume which is worrisome. Look forward to your insights on this for those of us concerned about going long at this time.
Hi Keith,
Could you talk about the technicals of gaps. Especially why they need to be filled.
I have a simple question – what let’s you to believe that we are in the final innings of this bull market and that recession is on the horizon? Could it not be argued that we are already in an “industrial recession” with PMIs contracting in the past year or so?
As I understand it, bull markets end with a sense of euphoria, extreme valuations and cyclical outperformance. What we have seen instead is extreme bond valuations, value (staples) trading at extreme multiples with no growth (30-40 times earnings) and tons of money sitting on the sidelines. Furthermore there is pessimism everywhere with MACD for the S&P finally turning green now after 18 month consolidation.
Please enlighten us with your technicals.
Hi Keith,
Ask me anything: what are the disadvantages to having shares within a pooled fund?
I have been reviewing Cdn listed ETFs, trying to develop a simple strategy for my investment accounts. It amazes me how low the daily volume is on most Cdn listed ETFs. One thing I have noticed is the difference, some times large difference in volume readings. For example (I use stock charts & Esignal) BMO’s web site listed volume for ZWE on OCT 29 as 87.5K yet both software packages showed volume of 16.5K – a considerably lower reading. I’m guessing the difference in readings is do to BMO creating or closing fund units for certain clients. So a warning to investors; technical indicators using volume are misleading at best. My question Keith is how would you guide a retail investor when selecting Cdn listed ETF’s? What criteria regarding ETF maturity, Market Cap and volume what would you suggest is required before the little guy can buy in?
Thank you
Carey