Portfolio manager Keith Richards of ValueTrend Wealth Management says the time will come to buy back into the FAANGs and stay-at-home stocks. It’s just not today.
This summer I was harping on—what was to me—an inevitable shift out of the “stay at home/technology/FAANG” names into value stocks like commodities, financials and infrastructure names. As readers of The MoneyLetter know, I was emphasizing value stocks and re-inflation stocks when others were trading technology. Tech stocks were, to me, stuck in an irrationally exuberant herding environment. To me, this was about as strong a contrarian sell indicator as I’ve ever seen. As we now know, the tables have turned. Value is surging, and tech/stay-at-home is flat-lining.
Back in the late summer, one of our clients at ValueTrend asked me if I thought the over-inflated FAANG names like Amazon, Apple and Netflix, along with the stay-at-home stocks like Zoom, Peloton and Shopify, would crash and burn. My answer was that I felt they wouldn’t crash. This, despite P/E ratios that are off the charts, and technically overbought charts. I felt that the likely scenario would be a regression to their long-termed trend-lines via a sideways pattern. So far, it appears that prognosis was correct. Amazon and the gang have not crossed their highs from August.
Let’s look at some of the big names that drove the S&P 500 Index to new highs over the summer. You’ll notice that on the daily price chart of Amazon, Apple, Netflix, Facebook, etc., that they all have one thing in common: totally flat performance since their mid-summer highs. Let’s look at Shopify and Facebook. These are just two examples, but the entire group looks pretty much the same.
How to trade this rotation
It’s clear from the charts that the ‘stay-at-home/tech/FAANG’ trade has stalled, just as I had warned readers of The MoneyLetter to expect. But that stalling doesn’t mean these names are down and out forever. Unlike the tech stocks of the late 1990s, these stocks actually have earnings and future growth prospects. As a contrarian investor, I have seen this pattern so many times during my 30+ years in the business that it makes my head spin. Everyone gets excited about a theme (FAANGs and stay-at-home technology forever!!).
But, like all overbought/overvalued situations, there comes a time where that excess is washed out. That time is now for the FAANGs & stay-inside stocks like Zoom and Shopify. The fact that these names are flat-lining, but NOT crashing to work off that excess, suggests that these stocks are still viable investments. In time, it will be appropriate to rotate back OUT of value stocks and inflation-protected names, and back INTO technology, etc. That time is not here yet.
From parabolic climb to flat-line
So, how do we know when the time to re-enter the technology and stay-home stocks has arrived? To answer that question, let’s look at the Amazon stock price chart. Really, you could substitute any of the above companies’ charts and make the same assumptions that I’ll apply to Amazon. But Amazon is the poster boy for the group. So, I chose it as my example.
You’ll note on the chart that after Amazon goes parabolic—as it did this summer—it settles into a correction or sideways period. This time it looks to be in a sideways period rather than a correction. You’ll note that the stock will get closer to its long-termed trend-line and its 40 week/ 200-day Simple Moving Average (SMA) when the corrective period ends. This stock (as with the others) will indicate that the ‘regression’ period of returning to its mean/average performance is upon us when it nears that trend-line OR if it finds support at the 200-day SMA. Note the parabolic move of 2018, followed by the extended flat period over 2019. The stock ran along its moving average without a clear move back into its uptrend until it touched the long-termed trend-line.
The safer bet for re-entering Amazon, and the other names, is not to assume a touch of the 200-day moving average will signal the end of the current flat period. Instead, I will be looking for confirmation of momentum indicators coinciding with a test of either the moving average or trend-line—with a preference towards seeing the trend-line tested. When that happens remains to be seen. All I can tell you now is that we at ValueTrend are NOT buying into this group. The consolidation hasn’t ended yet. The time will come to buy back into the FAANGs and at-home stocks. It’s just not today.
Keith Richards is Chief Portfolio Manager & President of ValueTrend Wealth Mgmt. He can be contacted at firstname.lastname@example.org. He may hold positions in the securities mentioned. The information provided is general in nature and does not represent investment advice. It is subject to change without notice and is based on the perspectives and opinions of the writer only. It may also contain projections or other “forward-looking statements”. There is significant risk that forward looking statements will not prove to be accurate and actual results, performance, or achievements could differ materially from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please consult an appropriate professional regarding your particular circumstances.
This is an edited version of an article that was originally published for subscribers in the December 2020, Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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