Tech Stocks Get De-FAANG-ed ... and That’s a Good Thing!

Let me come out and say right up front that I don’t usually cheer when stocks go down. After all, I am personally invested and generally become richer when markets go up.

But there are times when markets become too detached from their underlying fundamentals or sound valuations. And when those detachments grow to huge absolute and historic proportions, it makes me extremely skeptical of putting new money to work.

That’s exactly what happened with a select group of names earlier this year. You probably know them: Facebook (FB, Rated “A-”), Amazon.com (AMZN, Rated “C”), Apple (AAPL, Rated “B-”), Netflix (NFLX, Rated “C”), Alphabet (GOOGL, Rated “A-”) and other highflyers that carry the “FAANG” nickname.

The average gain in those stocks was recently close to 30%. So what’s not to like about that? How about the fact that ex-technology, the S&P 500 was up only 5.5%? That was well below the 21% gain for the Nasdaq 100. Indeed, until late last week, the FAANG names were responsible for more than 50% of the year-to-date gains of the Nasdaq.

That means by and large, the rest of the market didn’t participate in the rally anywhere near as much as tech. In stark contrast, the energy sector was actually down 15%, as you can see in this chart below. How can you feel comfortable with the broader market, or the underlying economic environment, when only a handful of names are rallying, leaving everything else in the dust?

Source: Bloomberg

Now look at the same chart … only since Thursday’s close. It shows a clear reversal, with the weaker sectors outperforming as money rotated out of technology and into beaten down names. In fact, the tech-heavy Nasdaq fell by 1.8% on Friday alone even as the Dow was positive – the first time that has happened since all the way back in 2002!

Source: Bloomberg

Me? I think the action is bullish. You can’t just have a limited amount of names carrying the entire market forever. It’s too risky.

Some investors will no doubt wake up in a panic after their favorite tech stocks lose their momentum. But they should still be very much in the black for the year. If anything, this kind of action takes some of the hot money out of high-flying names, making the broad market safer for everyone.

Bottom line: I like this awakening, and broader participation. The pullback will likely be bought after cooler heads prevail. Smart money will recognize that the exodus of hot money is healthy and start buying again. And I’ll be right there alongside them, recommending the best stocks to members of my Weiss Ratings’ Quantum Trader and Top Stocks Under $10 services.

Best,

Mandeep

Small Cap Edition, By Mandeep Rai, Senior Analyst Mandeep Rai has more than 15 years of investing experience, working as both a stock and credit analyst. At Weiss Ratings, he researches and evaluates financial and economic themes, and makes decisions on when to buy or sell specific shares for the Top Stocks Under $10 portfolio.