FAANG bites back but faces a fight

Tuesday’s U.S. stock market bounce, particularly among technology shares, raises questions of whether the ‘FAANG’ is biting back, or whether big sellers who sent the likes of Apple, Tesla and Amazon skidding lower will reload for another round.

There is of course no definitive answer to such questions, though the fact that there was no single trigger of the rout that kicked off last Friday, may offer clues.

Optimism that the Fed will unleash a classic dovish hike on Wednesday, and bargain hunting helped the Nasdaq erase almost half the 260 odd points lost in a tumble off record highs to a one-month low on Monday.

An ominous note from short-selling outfit Citron on graphics card star NVIDIA that zinged its shares, making them one of the biggest technology fallers since late last week, and a Goldman piece questioning Apple’s growth outlook are were widely seen as having catalysed wariness on valuations. That wariness particularly triggered declines in tech heavyweights Facebook, Apple, Amazon, Netflix, Alphabet-owned Google (the ‘FAANG’) Tesla and others.

The first five in that list have, after all, become the largest U.S. companies by market capitalisation. Together with Microsoft, they added $600bn in market cap to the S&P 500 before the sell-off.

Forecasts that conservatively suggest the forthcoming reporting season will show at least moderate earnings growth among such names were drowned out, albeit temporarily.

By Tuesday’s close though, most Big Tech shares had recouped around 1%-2% a piece, with Tesla jumping almost 5%.

However, it seems unlikely that an upsurge of short selling in the cohort, seen in recent weeks, will dissipate soon. That points to persisting weight on their shares. Stock borrowed to short Apple rose to $9bn by Monday for the first time since May. Naturally, that needs to be seen in the context of Apple’s $758bn valuation. Still, Apple is now No.3 most shorted stock in the world, behind Tesla, with $10bn outstanding and Alibaba, with $16bn borrowed.

Our FAANG/Tesla equal-weighted composite index (see below) broke back above a rising trend from March on Tuesday. However, by settling at a level that scrapes the topside of that trend (c.2760), it has failed to close definitively above it. In theory, that lack makes the FAANG and Tesla more vulnerable to a pullback. Furthermore, whilst the rising line accompanied FAANG/Tesla to highs, representing record peaks in the individual stocks, those highs now represent a barrier, given the market’s almost-immediate rejection of those prices.

In sum, not only does FAANG/Tesla now face the challenge of achieving an unequivocal close above the rising trend, there are risks that investors will repeat recent jitters, if or most likely when, the shares return to their best prices in the near term.

A clear recovery in FAANG/Tesla’s relative strength index momentum oscillator in neutral territory—i.e. not ‘overbought—is one plus point for continued gains in the near term.