foxex: FANG Stocks Drop During Nasdaq Bull Market Push

Chart Advisor | Focus on the Price

By John Jagerson, CFA, CMT

Friday, February 15, 2019

1. FANG stocks struggled today

2. Nasdaq officially re-enters bullish market

3. Euro stumbles on ECB rumor

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Major Moves

The S&P 500 rose to a new 2019 high today, but in a surprising turn of events, the FANG stocks didn't join in the fun.

The FANG stocks – Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Alphabet (GOOGL), which was formerly Google – have been market superstars since the Financial Crisis of 2008.

Traders have poured money into these stocks during the past decade to take advantage of the growth these companies have consistently delivered. Even when the stock market pulled back in early-2016 and again in late-2018, the FANG stocks outperformed the rest of the market.

So what happened to these market stalwarts today?

It seems the FANG stocks fell on a combination of profit taking before the long three-day weekend and specific news impacting each company individually.

Profit taking heading into a long weekend is a standard strategy for many portfolio managers to avoid the risk of not being able to immediately react to negative news.

Historically, many market pullbacks have been sparked by news that has come out during the weekend. This makes sense statistically because there are 65.5 hours from the closing bell on Friday to the opening bell on Monday during which the news can come out, whereas there are only 17.5 hours during which the market is closed on weekdays.

Long holiday weekends, like Presidents' Day, exacerbate this risk by adding 24 hours to the already long 65.5 hours where the market is closed.

Because the FANG stocks have done so well since the market started to recover after Christmas, they are natural candidates for profit taking.

News that has come out during the past few days has added to the profit-taking incentive traders are already feeling.

FB is likely facing a multi-billion dollar fine from the Federal Trade Commission (FTC) related to the Cambridge Analytica scandal.

AMZN announced it is scrapping its plans to build a new headquarters in New York City after various local groups organized persistent protests against the tax breaks the city was offering the company.

NFLX is facing the launch of Apple's (AAPL) new streaming video service, which is set to kick off with a big, celebrity-packed event on March 25.

GOOGL…is actually doing fairly well on the news front today.

As you can see in the heatmap below, the FANG stocks are islands of red in a sea of green.

This may very well be a one-day phenomenon, but it's important to watch what happens next week. If the FANG stocks continue to pull back after the market reopens next Tuesday, these islands of red could turn into a canary in the coal mine.

Nasdaq Composite Index

It's official! The bear market for the Nasdaq Composite Index is dead!

Just like that, the Nasdaq has climbed more than 20% – the official definition of a bull market – from its Christmas Eve low of 6,190.2 to close at 7,472.4 this afternoon.

The impressive part is the index was able to do this without the help of the FANG stocks, all of which are listed on the Nasdaq. Of course, the FANG stocks did plenty of the heavy lifting during the past six weeks, but they weren't participating when the index pushed past the finish line.

However, based on the strength of the current uptrend, this bullish run is far from over.

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Risk Indicators - EUR/USD

Just as the FANG stocks could be a canary in the coal mine for the U.S. stock market, the euro vs U.S. dollar (EUR/USD) exchange rate could be a canary in the coal mine for the health of the European economy.

The EUR/USD has been steadily dropping for the past week as the EUR has weakened compared to the USD, with the currency pair hitting a new low today on its hourly chart.

The EUR is coming under renewed fire today as rumors have started to swirl that the European Central Bank (ECB) is going to roll out a new targeted longer-term refinancing operations (TLTRO) program.

The ECB uses TLTROs to give long-term loans to banks so the banks can turn around and offer more loans to their customers. The ECB does this with the hope of stimulating the European economy by increasing the money supply. The more money businesses and consumers borrow, the more they are likely to spend, which can drive economic growth.

You never know how the market is going to respond to monetary policy programs like this. Sometimes traders look at the new program as a positive boost, which incentivizes them to take on more risk in search of higher returns in their portfolios. Sometimes traders look at the new program as a desperate cry for help, which drives them to reduce risk in their portfolios.

At first blush, Forex traders appear unconvinced a new TLTRO program will be enough to counteract the bearish pressure the European economy is facing, especially as we draw ever closer to the "Brexit" deadline on March 29.

However, this could be an important inflection point. If the EUR/USD starts to bounce from here, it might be an indication that traders believe this stimulative action will be enough to help lift the European economy.

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Bottom line: Which bull is next?

Now that the Nasdaq has joined the Russell 2000 in bull market territory, it doesn't seem like it will be too long before the S&P 500 and the Dow Jones Industrial Average join them.

We're only half way through Q1 2019. Chances are, there is a lot more bullishness in store.

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