foxex: Canary in the Coal Mine

Chart Advisor | Focus on the Price

Friday, January 17, 2020

1. When will stocks stop rising?

2. Amazon left behind in 2020

3. Are Amazon and Netflix the canaries in the coal mine?

Market Moves

As the S&P 500 index (SPX) closed .3% higher on the day, one hedge fund manager on CNBC this morning mused that at some point the market will eventually get to a level that will drive him out. Today, apparently, is not that day. Yet his comment prompts asking a question about what day that will be. How will any investor know when it is time to get out and get to safety? So far no one has developed the perfect indicator for that purpose.

However, one particular technique many astute traders and portfolio managers have used in the past is the technique of looking for unusual weakness in vulnerable stocks. In theory these weak stocks, canaries in the coal mine so to speak, should show weakness just a bit earlier than their peers. To find them we may need to look no further than the FAANG stocks.

Since 2017 these five stocks, Facebook (FB), Apple (AAPL), Amazon (AMZN),

Alphabet (GOOGL) and Netflix (NFLX) have dominated headlines and investor interest alike. In the first twelve sessions of 2020, we can look back and notice a significant difference in the way two of these stocks (AMZN and NFLX) have performed compared to the others. The chart below compares an equal-weighted portfolio of AAPL, GOOGL and FB shares to State Street's S&P 500 index ETF (SPY). The difference is stark as these stocks have strongly outperformed the benchmark, while the other two have not.

Amazon Left Behind in 2020

Six months ago as headlines about the U.S. China trade talks began to take on a more urgent tone, AMZN shares began to show a marked lag in performance compared to the S&P. The chart below shows how AMZN shares started 2019 on a tear, but midway through the year stepped off that trajectory.

Now for the year 2020 the disparity continues. The last twelve sessions of trading on the chart below are a glaring reminder that investors haven't changed their mind on the stock. Despite broad market gains today, Amazon shares lost .7% of their value. Comparing from the opening price of the year the stock is actually down by .5% compared to the 2.5% increase in the SPX . Meanwhile the Nasdaq 100 (NDX) has increased over 4% in that same time. If the markets were to begin a prolonged correction, it appears that Amazon might be one of the first stocks to drop significantly.

Read more:

Alphabet Shares See Monster Buying

Morgan Stanley Stock Gaps Higher on Earnings

Netflix Earnings: What to Look For

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Are Amazon and Netflix the Canaries in the Coal Mine?

It is worth noting that while Netflix is also lagging behind the S&P 500 when measured from January 1 in both 2019 and 2020, NFLX shares are generally trending higher (see chart below). It is also worth noting that both of these companies are the poster children for streaming video-on-demand services.

While Amazon has many other lines of business, it may be that the uncertainty of this enterprise has begun to weigh on investors. Perhaps they are uncertain how to value expectations for this fledgling industry. Such uncertainty makes them a prime candidate for the first stocks to sell in an uncertain market. We aren't there yet, but perhaps these stocks are worth watching for early warning signs.

The Bottom Line

Stocks closed higher again today even as they looked poised to sell off in early trading. A closer look at the FAANG stocks shows that three of them are leading the broader indexes, while two are lagging behind. Those laggards, Amazon and Netflix, may be good candidates to watch if the market condition turns sour.