FANG’s (Facebook, Amazon, Netflix, Google) have been the strongest performers on the market for some time. We at ValueTrend hold Google and Amazon, and have enjoyed the run. FANG’s a lot, guys!
We are now facing a dilemma. This group is quite overbought. By all accounts, I absolutely expect a correction sooner rather than later on our two stocks, and for this group in general. The question is – how much of a correction?
The problem with selling an overbought stock that’s in an uptrend is that you really are not selling into a technical breakdown. What you are selling is a strong stock that is trending up – yet deserving of a healthy pullback within the uptrend. If the pullback were to be, say, 10% or less – it is my contention that it is simply too difficult to play that trade. For example, each of these stocks have been overbought from either February or April. Stochastics – the quicker mover of the momentum oscillators- has been overbought since late February or March on most of the stocks. RSI, the mid-termed oscillator, has been overbought for 2 months or more. Had you sold on those signals back in February or April, you would have missed out on 15% or more in gains on pretty much the entire group. So – selling an overbought up-trending stock is hard to do at the right time.
Even if you are lucky (very lucky!) enough to pick the top–where do you buy back in? Will the stock ever go oversold – or will it pull back, say, 8%? If that happens and the oscillators return to their mid-range levels, will the stock then immediately turn around? Are you so smart that you can sell the very top, then recognize if the stock has put its full corrective move in an uptrend correction? If so, my hat is off to you! Most who try this trick sell on an overbought signal, and then watch the stock rise another 5-10% from their sell price to get even more overbought! Then, they finally see the stock fall 15% from this new high–which is 5% below their sell price. At this point, they buy back in after it begins to rise again, probably at or higher than where they sold. A frustrating game, indeed.
Sometimes history can be a guideline for future volatility in a stock. Google, for example, has had a couple of 10%-ish corrections here and there (2014 being the most prominent) – but its largely been a pretty tame stock to own.
Amazon has had some bigger down moves – 20-30% drawdowns can be seen on the chart. Netflix has had a few 20% + moves since 2013 – particularly in early and late 2014 and a nasty one in early 2016. Facebook, on the other hand, has had most of its corrections contained to around 15% or less over the past 5 years.
Google and Facebook appear the least volatile of the group. If you are looking to sell any of these stocks, you might expect that the better candidates to do so – assuming you are confident in your ability to sell “at the top”- would be the Amazon or Netflix. It’s obviously better to sell a stock that might have potential for a 20% correction vs. one with a 10% correction potential.
Were I to sell either of my positions – I’d probably pick on Amazon before selling Google. I would also rather hold Facebook than Netflix if a correction was in the cards. That being said, I have not made any decisions to sell either of the stocks we hold (Google or Amazon) at this time. Assuming their positive long term trends remain intact, a correction in these stocks might also represent a good entry point.
Keith on BNN
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Great blog on FANG stocks.
Selling Amazon vs. buying puts on Amazon. Let’s assume if we don’t sell the stock and instead buy Puts on Amazon to protect upside or downside movement. Will it work? For example buy puts July 980.
Yes, that might be an excellent strategy–see what the premium is for something that expires in late fall–I would think the danger period- if there is one- would end in the seasonal worst 6 months.
An unrelated question Keith.
Do you know if there is any website that I could get the closing prices for the old Nortel company? I was looking to see a chart including ~1995 through to 2005 or 2010 timeframes. Have not found anything myself so was wondering if you had any insight.
You could try to contact the TSX–they keep records I think…
With your recent blog referring to the state of the Bear-O-Meter and the potential for a near termed correction would it be prudent to put a trailing stop loss on larger positions? How do you determine your stop loss-10% below the current market price or below the 50 day moving average? Not wanting to have too narrow a range to avoid getting stopped out on normal market fluctuations. Finding your comments extremely valuable- thanks so much for sharing your insight!
Cathy I NEVER place physical stops on a stock. You can easily get “whipsawed” by traders–they see your stop loss, then take advantage and buy your stock, and the stock then goes back up.
Also–a % figure to sell is of no value–what you need to do is identify support levels. Sell on a 3 day minimum break below the support you identify. All of this is outlined in my book Sideways–possibly worth picking up a copy, as its an essential skill that I spent a bit of time talking about in the book
Hope that helps!
Thanks Keith. Have gone back to read your book again!
$SPT (S&P 500 information technology sector index) closing below support around its rising 50-day moving average (950.73) (1). Head and Shoulder topping pattern projects downside potential towards 885, should neckline support around 930 break. Will information technology index bring $SPX down with him? (fang components). S&P momentum barometer ($SPXA50R) is at 59. It remains intermediate overbought and trending down (Don Vialoux, 29/06/2017)
(1): Equity Clock, 29/06/2017)