MorningWord 10/8/15: Bad Breadth Behind Those FANGs – $QQQ

by Dan October 8, 2015 9:28 am • Commentary

In case you missed it, there’s a hip new acronym FANG, grouping four U.S. tech stocks that make up $1 trillion in market capitalization: Facebook (FB), Amazon (AMZN), Netflix (NFLX) and the newly renamed Alphabet (GOOGL). These stocks have much in common as all of them peddle their wares on-the-line, all compete in some way shape or form, and all have massive year to date gains, up 18%, 75%, 122% and 26% respectively! These sorts of gains among such a concentrated group of stocks are impressive, doing a lot of the heavy lifting in the broader market, but that’s not exactly a good sign for those who concern themselves with such mundane things as market breadth.

To put the concentration point in perspective, Apple (AAPL) and Microsoft’s (MSFT) combined market cap also equals $1 trillion, but these two stocks are unchanged on the year, and down 17% and 7% respectively from their 52 week highs. Then take the $550 billion in combined market cap of Cisco (CSCO), Intel (INTC), Oracle (ORCL) & Qualcomm (QCOM) to round out an even ten, all are down on the year, and all down at least 10% from their 2015 highs.

These 10 stocks I’ve mentioned and grouped are the largest tech stocks in the Nasdaq 100 (QQQ), and make up more than 50% of the index’s nearly $5 trillion in market cap. The Nasdaq 100 obviously has 1/5th the number of companies of the SPX, and that $5 trillion is about 28% of the SPX by market cap. So it can be affected even more by a concetrated group. And we see that, with the NDX up 2.3% on the year vs the SPX down 3%.

It’s clear that a handful of stocks with fabulous gains are doing the heavy lifting and representing the relative outperformance. To do some quick math, 20% of the NDX (FANG) accounts for nearly $250 billion in market cap gains on the year, on a $5 trillion index that is only up 2.3% on the year, or about $115 billion.

True believers will disagree with this, but this price action not bullish at this stage of a bull market. One that had until just recently held its uptrend from the 2009 lows.

The SPX recently tested the uptrend that has been in place since its lows in 2009, and after the past week’s rally, some would suggest this was a fairly healthy retest and bounce (right where it was supposed to) and that the bull market is still intact. It could be:

SPX 8 year chart from Bloomberg
SPX 8 year chart from Bloomberg

But the NDX deviated farther from its uptrend into this summer than the SPX, driven largely by the FANG stocks (and the biotech bubble). It has yet to retest the uptrend, which sits some  13% lower than current levels:

NDX 8 year chart from Bloomberg
NDX 8 year chart from Bloomberg

It remains our belief that the rolling liquidation in risk assets that started with commodities last year, and has recently hit our shores this past summer will eventually find its way to the handful of tech stocks driving all of the outperformance in the NDX. We remain committed to shorting QQQ on rallies and are looking to roll our most recent QQQ put spread that expires next week (here). Stay tuned.