FAANG Index Short interest Increases!We saw that tech had led the majority of this rally, retail or not. the tech rally was the center of attention. Which is focused around the largest tech companies we all know.
Facebook, Amazon, Netflix, Google, and Apple. Together they have a Market Cap of over $5.6Trillion. Making up over 35% of the Nasdaq Index. If we include the honorary FAANG member, Microsoft we drastically start to inflate the previous numbers and the impact of a few big tech companies on the market.
The FAANG and MSFT make up more than 25% of the S&P 500 as well. So this handful of stocks has the potential to move entire markets. Which it has done.
The Nasdaq hit an all-time high day after day, so did the S&P 500 at some point this summer thanks to the FAANG index and the tech stocks leading the way. This most recent sell-off has taken off over 5% in the biggest US indices.
We saw the FAANG collectively drop about 15-16% from all-time highs. however, that sell-off was signaled by a few things and has signaled that there is more to come. Here is why keeping mind both technical and fundamental reasons.
First off, we pressed into an all-time high after an all-time high in a summer market where the volume is thin and the trading is thin. Meaning the highs we not on strong volume. In this case, we also had the largest market cap company ever split, Apple did a 4:1 split. Historically meaning a lot of profit-taking after the post-split pump.
This was also the case for Tesla, which is included in the Nasdaq but still waiting for the S&P 500 invitation.
The next case for the downside was not only the overvalued market but also the "September theory downside" Which is something that has plagued markets for 40 years. On average over the past 40-years, September has ended red. Why? Because 1, the fund managers, institutional investors, or just big money coming back to the desk after labor day and doing some market movement or rebalancing. Which is just in time for the end of the third quarter. Rebalancing their funds after seeing tech gain 50% on average this year means drastic profit-taking. Which is why there is more downside to come. We just needed to see a slight rebound before seeing the continued downside. It's the equivalent of buying highs. You don't want to sell lows even if you are profit-taking.
Another interesting aspect is the strength that Biden gets throughout the election campaign process. The more ground Biden seemingly gains the weaker the market looks. Which could be a future indicator of what we could see throughout the election.
There are 3 scenarios we want to outline for the future of the FAANG and the overall market indices. There is a more perceived downside throughout September. This is due to continued rebalancing and profit-taking anticipated to take place in the market. Taking advantage of the weak volume to the upside.
Scenario 1:The first being the FAANG drops down to tag the Nasdaq's perceived downside. In order for that to happen though, We'd need to see the rest of the 75% of the Nasdaq hold out without falling or even slightly climb. This doesn't seem that probable, the big stocks in the FAANG pave the way for how the rest of the Nasdaq stocks will most likely react. This would mean the Nasdaq stays relatively flat while the FAANG falls another 11%. This is an unlikely scenario because if the FAANG drops, Nasdaq will probably get killed.
Scenario 2: This is the least likely scenario out fo the 3. Involving the Nasdaq climbing while the FAANG drops about 5% to meet somewhere in the middle of the current divergence. That is highly unlikely because if the FAANG drops, the NQ is dropping almost for sure.
Scenario 3: The last scenario involves downside in the FAANG due to continued profit-taking and rebalancing out of the major tech stocks. Which would push the Nasdaq down to the -15% mark, as it is already through the -10% mark from highs which marks a correction? In this scenario, the FAANG will continue to drop and some of the big tech stocks would be more than 20% off highs into a more "natural" valuation. This scenario is the most likely out of them all.
To conclude it does seem like there is more downside as a lot of the FAANG and tech stocks are overbought and a lot of investors are profit-taking after such incredible gains. We could see the tech stocks pull back into their summer consolidation prices which would be a great area to look for the reversal.
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