U.S. Stock Market Cracks Are Showing: FANGs Give 100% But Is It Enough?

NASDAQ stocks extended their bounce on Monday but doubts remain

Prospects that the recent rally in borrowing costs might be easing off are keeping the rebound in technology stocks going this week. It comes after the S&P 500 IT sector recouped all of its losses last week and rose 0.6%. Whilst Friday’s blow-out monthly job numbers are helping underpin confidence in the US economy, sluggish wage growth continues to casts doubts that the Fed will go ahead with a third planned rate hike this year.

Fed fund futures for December—which the market sees as the likeliest month for a move—still indicate no better than even chances of a hike. That’s after Friday’s data showed hourly earnings inched up a tenth of a point in June, half the minuscule rise widely expected. It was a setback for the financial sector, which has galloped 6.5% higher over the last month, on the back of the fastest rise in US benchmark yields since a rally to two-year highs in December.

Tech’s comeback is also casting doubts over the widely observed notion that a value orientation is returning to the fore among investors after ‘growth’—quite synonymous with the tech sector—collided with index resistance and other valuation challenges in June. The upcoming technology sector reporting season will be a critical juncture, as it should demonstrate how accurately earnings growth has been priced.

Unfamiliar faces

Even beforehand however, there are several signs of lingering uncertainty among investors over whether growth/value rebalancing has run its course. For one thing, there was a glaring lack of recent stock market leaders among the ranks of Monday’s and Friday’s best performers. Hugely capitalised FAANG shares (Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Google (NASDAQ:GOOGL)) didn’t make stand-out gains. Nor did any of the year’s top tech risers like video games group Activision (NASDAQ:ATVI), and semiconductor machine maker Lam Research (NASDAQ:LRCX). In fact top five S&P 500 shares and FAANGs (almost, but not quite synonymous) were down as much as 8% on Friday from early June peaks.

And in keeping with the way instability started among technology shares towards the end of last month before fanning out, Friday’s snapshot showed a broad swathe of S&P 500 sectors in a weak phase. 6 out of 11 sectors were down 1% in the month to date. At the same time, the ratio of new highs to new lows continues its decline since February, despite the market’s record-breaking run this year.

FAANG gives it 100% but…

Major technical price factors are not doing a great deal to dispel uncertainties and doubts about whether the rebound is trusted either. Compiling the FAANG and Tesla (NASDAQ:TSLA) into an index and charting it as one composite instrument, as shown below, suggests US stock market titans remain stuck between supports and recently established new all-time highs. Traders customarily see each unsuccessful attempt to breach such thresholds as invoking increased risk of a severe failure. And with recent retracements by the group ranging between 88.6%-123%, well beyond the 61.8% extent typically classified as orderly, it’s difficult to judge that reliable stability has returned just yet.

At least an apparent consolidation zone (or channel) between the commencement of the May up leg and this month’s low keeps hope of an upside break alive. Still, it’s likely that another failure by FAANG/Tesla to regain last month’s peak will unsettle these stocks again. Any broader impact may be exacerbated if the group breaks support. At this stage it seems only a string of resounding earnings beats could bring a break on the upside.

h3 Technical price chart: Facebook, Apple, Amazon, Netflix and Google composite/h3

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Written By: Ken Odeluga