Markets often enter corrective phases as former leaders roll over, and new leaders take their place. Rotation is a healthy thing, and can keep a bull market rising. But – such changing of the guard often involves a bit of chaos as the leading stocks give ground. Market leading stocks or sectors which have become disproportionally influential on indices and investors’ portfolios hurt the broader markets as they round over. It isn’t until the new leaders find their voice, so to speak, that the market can re-enter a bull phase. This is why I spend so much time talking about the 4 Phases of the market in my book, Sideways. If you haven’t read the book – may I humbly recommend you do so. I feel that understanding this principle is vital for long termed stock market investment success.
Over the past number of years, the market has been highly influenced by the FANG’s…I tend to add one more ”A” into the FANG acronym to include Apple. The FAANG’s (my version) are: FB, AMZN, APPL, NFLX, GOOGL.
I’ve noticed that the FAANGS seem to be showing signs of slowing. Most of them did NOT make new highs in early May when the SPX did. Let’s take a look at these 5 stocks on an individual basis to see how they look:
Facebook hasn’t made a new high since last summer, when it hit $215. Its currently around $185, and the recent high of under $200 did not match the heights of the SPX. Meanwhile, the stock is losing ground along with the broader markets – suggesting that it is not acting like an outperformer on the way up, despite being just another falling stock on the way down.
Same story for Amazon as with Facebook. No new high in May, despite the new high on the SPX. Less upside, but all of the downside. Hmmmm…
With the China trade deal causing concern, Apple has been a bit more vulnerable than our first two charts. Yet, well before the trade fears began, Apple had substantially failed to put in a new high. At least AMZN was close. But Apple—not so much. And it is disproportionally getting hit on the chin as the market sells off. Certainly this market leader is showing signs that the honeymoon has ended.
As with the first three charts – no new high in May for Netflix. Interestingly, the stock is holding its own in the current trade war selloff. It’s been flat lining for most of 2019. Nonetheless – the lack of new highs in a broader market rally to early May suggests that NFLX – while not as volatile as the others at the moment – is losing some of its charm. Yet another rollover and rotate candidate, methinks.
Google is the one stock of our 5 leaders that seems to be holding true to the broader SPX chart pattern. It made a new high in early May along with the market. Yes, it has declined with the rest of the market – but not grossly more so. So far, this seems to be the one kid in this class who might achieve a passing grade.
Be careful out there. As I noted on my last blog, the market is seeing some rotation into defensive sectors. And it’s not just been since the China trade talks went sour. There’s clearly some changing of the guard going on here. And that means some interim volatility until the new boss(es) takes charge. I’ve said it before, and I’ll say it again – trade, rotate, and be aware.
Ask me Anything
For those who missed my last blog—I noted that I’ll be posting answers to broadly interesting questions regarding my technical take on sectors, commodities and markets. Post a comment below and I’ll do my best to answer it next week.
I could not help but laugh, Thank you for the morning laugh! (pic at top of blog)
A little humor goes a long way during these tumultuous trading/investing times.
To hedge or not to hedge … that is the question.
In the past I would split a particular holding into a hedged ETF and an unhedged ETF.
The thought was to reduce the currency risk.
However over the last 2 years, it seems it is better to use the unhedged version.
When the market was bullish both ETFs would go up but the unhedged did much better, typically 5% better.
When the market was bearish both ETFs would go down almost equally. It was if the hedging
did not provide any benefit.
It seems when the market goes up, then so does USD and when the market goes down, then CAD goes down alot.
It seems CAD is more affected by oil prices and dumb Ottawa politicians.
Going forward, no more hedging. Why?
Oil will probably gently move around but not significantly.
CDN voters just don’t want to hold their leaders accountable.
Forget CAD, all in on USD … long live the king … oops … the president.
yes, there is a flight to safety –ie the USD–when chaos abounds. And you know I have blogged on the demise of the Canadian economy and the loonie for a long time now – the first of which can be earmarked around the last election. I hate being right.
Love your “Ask Anything”. It looks like the markets are rolling over broadly from a weekly chart perspective – and we are entering the bearish time of year. If one were to go short – what do you feel is the “best horse” (e.g. semi’s, oil) and what entries/exits/stops would you use? Thanks much!!
Just published the answers for my “Ask” blog. But I can answer your question succinctly.
You simply must visit my blog on hedging–its a pretty comprehensive look at the securities you are enquiring about: https://www.valuetrend.ca/hedging-in-a-bear-market/
Feel free to forward that blog to others–I feel it may become a very useful bit of knowledge going forward…..
Keith I am old enough to remember the start of the mutual fund industry and watched the plethora of funds develop, and then many years later the reduction. So it makes me wonder about ETFs as this industry is on the up-swing with every theme imaginable. So my question is what are the negatives avout this industry. BNN just starting to talk about the revenue generation for the ETF company lending out their stock for those wantig to short. What other hidden gems can you tell us about, around liquidity, the companies, etc.
Lana in Vancouver
Lana–mutual funds were something I made myself very unpopular with the industry in the 1990’s. I spoke out about them–writing scathing commentary on their costs and inefficiencies in the publications I write for. The brokerage firm(s) I worked for had virtually 90% of their staff selling the things–so you can imagine how in love they were with my acid comments. In fact, the executive of Merrill Lynch (who I was with at the time) told me to “cease and desist that commentary. Ironically–now everyone knows their downside–but back then, it was even the clients who had drank the kool aid–I spent my day talking people out of them!!! I can honestly say I was one of a small group of people who openly criticized them in the 1990’s. I was an enigma.
ETF’s can be a little like mutual funds–but there are some key differences that make many of them (not all of them) superior. First–the majority of them are based on highly liquid indices like sectors or broad market indices. Second, those types of ETF’s keep their fees much lower than mutuals. Third–They can be bought and sold the same day–no penalty to sell, unlike the minimum holding period of funds. Yes, you always have the same problem as with a stock –ie bid and ask spread–but that’s the game.
The ETF’s I am concerned with are the rampantly manufactured ones–much like the fund industry did during their heyday. There are fundamental value twists on indices–there are new non-industry standard sectors being created –stuff like that can cost more, and often has way less liquidity. So–to your point–you have to do your homework.
Hope that helps