Again over 40% of the tech sector in QQQ is weighted on these five companies.
Emphasis nearly 1/5 of the entire SPY ETF is based on these five companies.
FANG vs S&P
A most recent article from yardeni.com has posted a very good comparison of how the big tech companies have whether the stock market comparatively with the S&P. Here is the link for full article. I summarize with a few noticeable charts. One note here is that Microsoft was not included, but Netflix is, in the study but easy to see the difference between FANG performance versus S&P would have been greater. Also Nelflix had already reported 1st quarter earnings with slight negative price outcome.
Chart above shows the market cap value of FANG based on yesterday's 4/24/2020 market prices compared to that of S&P excluding FANG. The market cap separation will likely be more transparent if Microsoft was included in FANG while excluded in S&P.
Running up to earnings the P/E in FANG has been pretty high compare to all other S&P components. The FANGs combined for a P/E of 55.4 yet the current performance lacks quite a bit. Chart below shows market cap of FANG as a total % of S&P and FANG's earning as a total % of S&P up to date. That is 12% of total price compared to 4% of total S&P earnings. The bullish speculation of FANG seems to be reasonable since S&P estimate earnings each year is near 8% and FANG makes up half of that. On top of that the revenue going thru FANG is low compare to the rest of S&P leading to the possibility and maybe even expectation FANG to expand its revenue it would make even more profits. Since the pandemic many are flooding into FANG stock in expectation that future growth would accelerate.
How to Trade upcoming Week?
Although earnings are significant next week this has been anticipated for some time. What has not be anticipated is the drag on the pandemic and another fallout in some other asset prices. This week we saw oil price collapsing in historic proportions with no major reasoning as to why it happened. Global economies being shut down do to the pandemic was aware of by all but oil prices continuing from a gradual decent only to break down this week with no real major catalyst. OPEC had finalized a drop in production and storage of oil around the globe was increasing yet still had capacity. The only element I can see for the dramatic drop was lack of liquidity in commodities trading while oil prices were already in a down trend. Lacking liquidity in the form that there were more sellers than buyers that only made it worse as monthly contracts expire and many buyers did not want to hold physical oil therefore had to sell at even negative rates.
Markets and specifically the FANGs will have what I think similar approach this coming week in prices. Not necessary to the down side. Since the March crash all FANGs stocks have held up very well and this has been happening for weeks. The recovery in prices has many believe these are investments that are worth holding while the pandemic is still overshadowing the global economy. With this much momentum to the upside that in with itself pulling up the overall US market it would not be all that surprising that right before and after the earnings the FANGs continue to outperform. If in fact that is the case the markets as a whole will also fair better.
The opposite side of this is although FANG sentiment is bullish the majority of the market is still bearish. The results of recent Netflix although were decent and one can even say spectacular compared to past quarters was not enough to boost its share prices. Yet it is still holding up near all time highs. The optimism in FANG is high so expectation if not met will face grave consequences. Consequences as in dramatic fall in prices. Any one of these companies falling off in stock price will have noticeable effect on the overall markets since they weight a lot per component in most indexes. Here lies a hidden but obvious danger. Since overall markets have been lower for the year and recent price rises have only recovered some losses the actual market trend should be presumable bearish. If in fact any one of these FANG components drop it may lead to another swift and aggressive fall in overall markets since markets are still somewhat fragile.
Overall I would be conservative in investing in the upcoming week and as earnings plays out see how the markets reach. If prices indeed are negatively effect by earnings there is likelihood further downside will be ahead hence not too late to wait. While if FANG stocks continue to rise after earnings the overall market may likely continue higher on the back of FANG's momentum This too would not be a late entry going long as majority of components besides FANG are still lagging and need to play catch up in upward price movement.
Disclaimer:
I am not a financial advisor and all this post information is for entertainment purposes only.