Are you using FANG stocks as a market barometer, at least for the technology sector? You might want to rethink that idea. See, while all four of these names – Alphabet, Amazon, Netflix and Facebook (Google changed its name to Alphabet after the clever acronym was created) – are more or less in the same consumer-facing boat, the members of this wolfpack aren’t moving in quite the same herd they were yesteryear.
It matters, because misunderstanding what’s happening within this small group of equities could lead you to the wrong conclusions about the true health of the market.
Over the course of the past year, Netflix (arguably the least-fiscally sound organization of the four) has easily outperformed all the others in the FANG group. Its 130% rally since March 7th of 2017 is well ahead of the number-two gainer, Amazon, with its 82% advance for the timeframe in question. Past that, Facebook and Alphabet are a distant third and fourth, up 31% and 30%, respectively. The graphic below puts things in a stunning perspective.
For most traders, it probably doesn’t matter. FANG stocks are a simple way of categorizing the market’s behavior on any given day, but few people look – or even care to look – at the group’s long-term performance.
There are a few traders who have made DIY indices of the four stocks though, and a handful of corporations who have done the same… even if only for publicity purposes. If you’re one of them, or are following one of those home-grown, unofficial indices, pay special attention to the chart above. Netflix is carrying all the weight, and then some. See, NFLX and AMZN are leading the pack, while GOOGL and FB are merely matching the performance of the tech-centric NASDAQ.
In other words, not all FANG stocks are market-beating. The two that are beating the market are doing so for questionable reasons. Netflix is up to its eyeballs in debt, and Amazon’s paper-thin margins may still overstate the company’s actual fiscal success. It doesn’t matter to momentum-oriented traders, right up until the time it does matter. Then it matters in spades, as the bigger the rally, the bigger correction.
Or, who knows? Maybe the unusual, oversized bullishness from Amazon and Netflix will persist indefinitely… fundamentals ignored.
Still, there’s no denying the four FANG stocks make for some of the market’s best trading, as each is plenty volatile, up and down. The trick is catching them at the right time, capturing a little slice of a big move.
To that end, BigTrends offers an option trading service specifically designed to take advantage of the nuances of these highly-watched stocks. Our tools and bag of tricks has been tweaked to capitalize on the volatility resulting from the active trading crowd that keeps close tabs on these FANG names.
And they work quite well, by the way. On Tuesday we locked in a 118% gain on the Netflix (NFLX) March Monthly (03/16) 307.5 calls (NFLX 180316C307.5), paying $7.00 per contract on Monday morning and then getting out at $15.30 on Tuesday morning. Not bad for one-days’ worth of work.
The five-minute chart of Netflix shares below gives you a rough idea of our trade approach. We saw a high-volume buy-in late Friday, and though NFLX shares got Monday’s action started with a little selling, it didn’t take long for the bulls to find a key moving average line to use as support, pushing up and off of that to start an advance that would last all the way through to the following morning… Tuesday morning.
We drew a proverbial line in the sand shortly after the market opened on Tuesday, wanting to stick with the rally as long as it was in motion, but not wanting to give up our triple-digit gain we had in-hand at the time. The stock peeled back just enough to activate our stop, locking on the exit at $15.30 for a 118% score.
In retrospect, though NFLX poked around at slightly higher levels later in the day, we were glad we had enough discipline to get out when we did. There wasn’t enough proverbial meat left on the bone to bother with, and the way volatility waned later on Tuesday, option premiums actually fell to less than where they started the day out. Spotting the premium-inducing volatility is just as critical as spotting the trend, and our trading algorithm does both.