This might be the most important article I have written all year.
Take a look at the chart below. It is of the FAANG Index, an index composed of the titans of finance – Meta, Apple, Microsoft, Netflix, Google, Nvidia, to name a few.
This morning, this index has broken an important, key support level.
The reason this is so important is that huge rallies for the so-called “Magnificent Seven” stocks – Apple (AAPL.O), Microsoft (MSFT.O), Alphabet (GOOGL.O), Amazon (AMZN.O), Nvidia (NVDA.O), Tesla (TSLA.O) and Meta Platforms (META.O) – have driven nearly all of the S&P 500’s 12% year-to-date gain because of their outsized weighting in the index.
Without these stocks, the stock market index averages like the S&P 500 would be negative.
And so, these stocks turning lower means that investor gains may soon disappear.
Because index fund investing is so prolific, the impact of this will be felt by a great number of investors – those who invest directly in index funds, those with 401(k) investments, pensions, etc.
My point is that this is a big deal as just about everyone with investments has some form of exposure to the massive concentration risk that the popular averages expose investors to.
Here is a chart review of some of these popular stocks.
Apple has sliced through its 200-day moving average like a hot knife through butter.
With 3Q earnings due in a couple of weeks, the stock is in a downtrend with a potential target of $150-$153.
Meta reported after the close yesterday.
The stock beat on earnings but gapped lower on today’s open and is trading below the POC around $300.
The next stop is likely a test of the 200-day moving average.
Nvidia, this year’s AI tech darling is completing a head and shoulder topping pattern and is on the verge of breaking lower.
At a minimum, I would accept the gap at $317 to be filled but could see $280 as there was very little stock volume in between those levels.
Amazon reports today.
The chart looks horrible.
The 200-day moving average may cause a pause in the decline… but real support may not show until near $100.
Google gapped lower yesterday after disappointing earnings and is continuing to trade sharply lower.
The most significant price support is found down around $105.
Microsoft did provide investors with a solid earnings report and initially gapped higher on Wednesday.
However, today, it has already filled the gap after reversing lower.
Naturally, with this group of stocks representing over 30% of the S&P 500 and 60% of the Nasdaq 100, by market-cap weight, the impact of the weakness in the FAANGs is causing technical damage within the indexes themselves.
On Wednesday, the Nasdaq 100 (futures chart shown below) reached the lower end of a trend channel that price has followed since January.
Today, price has decisively broken the channel and will likely test the 200-day moving average and the additional target levels displayed.
The S&P 500 Index (future chart shown below) is weaker.
Price action has already breached the 200-day moving average and is testing important support at the 4140-4160 level.
Below here, the next major level of support is 3970.
Either interest rates must decline drastically from current levels or the valuations among these stocks are primed for a meaningful reappraisal.
It’s not too late to become defensive.
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