Netflix ran into resistance this month from its summertime highs. Photo: Bloomberg News
It is no secret that market leadership over the past few months has been rather narrow as many sectors struggled. Only a limited number of mostly highly-capitalized and mostly technology-related stocks have propped up the major market indexes while the “average” stock languished.
But the good times may be coming to an end soon as the big cap Select Sector SPDR Technology exchange-traded fund (ticker: XLK ) has underperformed the market for the past three weeks and the so-called FANG stocks have seen outflows of money.
FANG is the acronym for Facebook ( FB ), Amazon.com ( AMZN ), Netflix ( NFLX ) and Google, recently renamed Alphabet ( GOOGL ). While Wall Street is always enamored with such cute groupings – think PIIGS and BRICs – there is good reason why this one matters. And that reason – leadership – is now failing.
Netflix, for example, ran into resistance this month from its summertime highs. And when it did, it scored a rather nasty outside-day reversal to the downside to signify a sea-change of mood from bullish to bearish (see Chart 1).
Chart 1
Netflix
Money also flowed from Netflix stock following the reversal according to the on-balance volume technical indicator. In fact, this indicator has been in a general downtrend since June telling us that the rally from October through early December was not well supported by volume and hence demand was limited.
The bull market trend since 2012 is still officially intact but momentum heading into the December high was much weaker than it was heading into the summer high. As with on-balance volume, momentum indicators show bearish divergences with price action and that is a warning for Netflix investors.
Alphabet is also holding its long-term rally and continues to lead the market in the short-term (see Chart 2). However, on-balance volume peaked in early November suggesting that despite a lack of demand the stock is holding its ground simply because sellers have not started to attack it. That is not a sign to sell on its own but it does leave the stock vulnerable. Should investors decide they need to raise cash; this is the place from which to do it. After all, it is actively traded and near an all-time high.
Chart 2
Alphabet
Although not considered a tech leader anymore, Apple ( AAPL ) should also be part of the conversation. This stock has been falling since July and shed nearly 19% since then – just a hair shy of so-called “bear market territory.” Worse, its long-term chart shows the stock completing a giant head-and-shoulders topping pattern (see Chart 3).
Chart 3
Apple
All that is left is the breakdown below the pattern’s support, or neck line, just 2% below current trading. Should that occur, there would be little in the way of Apple tumbling to the upper 80s. Shares recently traded near $107.
As mentioned, the SPDR tech ETF has been lagging most of the month and that is in stark contrast to its leadership role over the past two years. Last month, I explained why the SPDR tech ETF does not represent the average tech stock. The better proxy is the NYSE Arca high-tech index, formerly known as the PSE high-tech index, which had been lagging the market.
But now with the XLK ETF backing down thanks in large part to changes in the FANGs, one of the few engines left for the market has lost its power. It’s not dead yet but when so few sectors are really carrying the load, the loss of any of them can be problematic.
This is likely to be a big issue heading into the new year. Should the FANGs suffer serious breakdowns then the broad market is going to disappoint.
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