Last night on CNBC’s Fast Money we had a spirited discussion about the year to date out-performance by the so-called FANG stocks (Facebook, Amazon, Netflix & Google, up 7%, 5.5%, 7.7% & 4% respectively vs the Nasdaq Composite up 2.5%).
My points were fairly simple, for the first half of 2016 it seemed that the entire index was propelled by the concentration in performance by this highly concentrated group of stocks (ex semi’s which were propelled by m&a), and maybe the broadening out of the rally in Nov and Dec was actually quite healthy. Now these stocks are rallying to start the year out, and it may be a little bit of a dead cat bounce. I have no idea what sort of Q4 results and guidance these companies will offer when they report in the coming weeks, but proceeding with caution might make sense when you consider, particularly in AMZN & FB, investors’ desire to shoot first and ask questions later following their Q4 guidance in late Oct.
Apple (AAPL) and Microsoft (MSFT), both which have mildly under-performed the Nasdaq ytd, but are up on the year, and you have six stocks make up 40% of the weight of the Nasdaq 100 (QQQ). Which leads me to the technical set up. On last night’s show we had Evercore ISI’s technical analyst Rich Ross who is feeling a bit bullish about FANG:
My comments there were also simple, beauty is in the eye of the beholder. Ross thinks that FB is making a nice base of late, building steam for a move back to the Oct highs. But to me it looks more like a diving board, with a possible little bounce then a big plunge lower. AMZN is certainly a wild card, NFLX is making new all time highs, not much to add there, and GOOGL looks poised to breakout to new highs. The point here is simple, the presumption that one or two of this group (and throw AAPL & MSFT back in) will not falter would be a mistake given the tough talk on trade, the deceleration in some of the hyper growth stories and the surge of the U.S. dollar the last two months. But there is a chance the big cap tech names could catch a bid on any news or merely continued enthusiasm for overseas cash repatriation. But that’s a big if both of whether it will happen and when.
From where I sit I think it makes sense to avoid single stock risk in these names, even if you think they are about to play catch with the broad market. The QQQ could be the best vehicle to play for such a move into Q4 earnings season. The one year chart of the QQQ is nothing short of constructive, in December breaking out of a 4 month base, having spent the last month basing above prior resistance:
The QQQ has fairly healthy support down at $115, down about 5%, which also happens to be the july breakout level to new then all time highs:
So if you like the technical set up, you think that at least a few of these stocks make a run back to their prior highs, then the way to play into Inauguration and more importantly Q4 earnings/Q1 guidance is with defined risk in a vehicle that has less idiosyncratic risk.
Short dated options prices in the QQQ are fairly attractive for those looking to define their risk with long premium directional trades, with 30 day at the money implied volatility (the price of options, blue line below) in the QQQ at just 13%, well below the pre-election highs of 20%. That said, just a hair above realized volatility (how much the etf has been moving, white line below) at 11.5%. What this means is that options prices are low (but slightly expensive relative to the actual day to day movement of the market). But here is the thing, I suspect stock movement will pick up in the coming weeks and I’d rather own options than be short them in the QQQ:
Here are the confirmed (c) and expected (e) reporting dates for these 6 companies:
NFLX (c) – Jan 18th
GOOGL (c) – Jan 26th
MSFT (c) – Jan 26th
AAPL (c) – Jan 31st
FB (c) – Feb 1st
AMZN (e) – Feb 2nd
I think it makes sense to look to Feb expiration and buy calls in the QQQ rather than trying to pick names into earnings. The call buy allows one to play for a continuation in momentum but with defined risk in case earnings starts a market reversal.
So what’s the trade?
QQQ Buy Feb 122 calls for $2.20 or 1.8% of the etf price
Break-even on Feb expiration:
Profits above $124.20
Losses of up to 2.20 between 124.20 and 122 with max loss below 122.
TO BE CLEAR, THE US STOCK MARKET IS GEEKED UP ABOUT DOW 20,000, I HAVE NO IDEA WHAT THAT MEANS. WHEN IT FINALLY HAPPENS, AND TRUMP TWEETS AND TAKES CREDIT, MAYBE WE GET A PULLBACK 🙂 EITHER, DEFINED RISK FOR CONTINUED NEAR TERM GAINS IN CROWDED STORIES IS THE WAY TO PLAY!