The FAANG Stocks May Be Getting Long in the Tooth

The FAANG Stocks May Be Getting Long in the Tooth

Posted on August 27, 2018
Market State 1- Bullish (1 days):  The S&P 500 reached a new high closing mark on Friday of 2874.  The last new market high was on January 26th at 2872.  At the same time, the market is now back into Market State 1.  The market was previously in MS 2 following a short pullback.  Over 75% of MS 2 periods return to MS 1.  Most new highs occur in MS 1.  Being in a bull market, risk is low.
Canterbury Volatility Index (CVI 47): The Market’s CVI levels declined 3 points throughout the week to CVI 47.  This is CVI’s lowest reading since January 31st.   CVI has been declining through most of the last few months.  This is a bullish signal, as bear markets do not occur when there is low or decreasing CVI.
FAANG is an acronym for the 5 stocks that are Facebook, Amazon, Apple, Netflix and Google. This group of 5 stocks accounted for 14% of the S&P 500’s market capitalization as of June 30th of this year. The larger the capitalization of a stock, the more impact it will have on the S&P 500’s percentage return. For example: During the first half of 2018, Amazon was up 55% and (because of its size) had a 19% impact the S&P 500’s total return. Let’s contrast Amazon to the much smaller Adobe Systems. ADBE that was up 48% for the year but (because of its smaller cap size) it only has a 3% impact on the S&P 500’s return.

Source: CNBC
Here is a chart of the FAANG stocks, along with the S&P 500, from June 30th, 2016 to June 30th, 2018.  The FAANG stocks have exhibited a parabolic advance compared to the S&P 500.

Source: AIQ

The S&P 500’s strong performance, verses most other major market indexes, is primarily attributable to the impact of the five large FAANG stocks. These 5 stocks are experiencing a “parabolic” advance. Such an advance cannot continue to meet investors lofty expectations over the long term. Therefore, it is only a matter of time until the “FAB 5” will experience a period of substantial underperformance. This may not occur next month or this year, but it will happen. When it does, then the traditional buy, hold, and rebalance “strategic” investment methodology will hail because it has no answer for dealing with periods of high volatility and sharp declines.

Bottom Line:
Every liquid market or security will experience periods of high volatility and substantial declines. The largest declines will typically follow periods of substantial gains. Parabolic advances all end the same way- with a sharp and substantial decline. Adaptive portfolio management was created to deal with the risks that come from sharp increases in volatility.
Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.