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FAANG stocks are popular. But now one of them is beginning to lose its mojo.
How long could this last? Let’s examine the issue with the help of a chart.
Please click here for an annotated chart of the stock of Netflix NFLX, +0.63%.
Note the following:
• There was a time when Netflix’s stock was outperforming other FAANG stocks — Apple AAPL, +1.78%, Amazon AMZN, +1.38%, Facebook FB, +1.76% and Alphabet unit Google GOOG, +0.09% GOOGL, +0.09%.
• Over a long stretch, Netflix’s stock significantly outperformed the Dow Jones Industrial Average DJIA, +0.17%, S&P 500 Index SPX, +0.62% and the Nasdaq-100.
• Netflix had been the darling of FAANG stocks. But as the chart shows, times have changed.
• The most money with the lowest risk is to be made by identifying changes before Wall Street does. This is the premise behind our method.
• The chart shows the Arora call to sell or short-sell Netflix. Netflix was sold short at an average price of $380.
• Wall Street was late in fully identifying the potential impact of competing services from the likes of Apple, Disney DIS, -0.16% and AT&T T, -0.20%.
• The chart shows the Arora signal to buy to cover the last tranche of Netflix as low as $255. The Netflix stock trade has been very profitable.
• The chart shows when Netflix earnings were released. Earnings showed a number of cracks but were better than feared.
• As the chart shows, the stock had run up going into earnings. Segmented money flows show that the buying started due to a short squeeze. After all, short-sellers had great profits on the stock and they wanted to buy to cover before the earnings.
• Going into earnings, once the momentum reversed to the positive side due to the short squeeze, segmented money flows show the momo (momentum) crowd jumped in on the momentum reversal.
• As the chart shows, after the earnings release, the buying was mostly from the short-squeeze and momo crowds.
• Lately smart money flows in Netflix have been mostly neutral. Near the prior highs, the smart money flows in Netflix were mostly negative. Segmented money flows give you an edge. They are like an X-ray that enables prudent investors to see what is really happening below the surface. To learn about money flows, please see “Momentum investors are now buying shares of Apple, Amazon and Netflix.”
• When a change is in high gear, the traditional fundamental analysis based on ratios such as price-to-earnings (P/E), price-to-sales (P/S), etc., are often misleading. Much of the analysis on Netflix is still backward-looking. Relying on such analysis is like driving while looking in the rearview mirror.
• Investors ought to consider a combination of forward-looking fundamental analysis with sharp focus on the changing landscape and technical analysis.
• When a change is happening, the most beneficial element of technical analysis is in understanding price action. Prudent investors may want to pay attention to Arora’s 16th Law of Investing and Trading: “Mastering price action and overlaying it on top of change makes more money than anything else.”
• The chart shows a simple way to analyze the price action.
• The chart shows that the spike on the short squeeze did not last. Netflix’s stock closed near the lows of the day. This was a bad sign.
• The chart shows that on the next day after the up spike, the price broke below the pre-earnings point. This was another bad sign.
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What does it all mean?
The foregoing analysis shows that Netflix’s stock is showing all the signs of a stock that can fall much further on bad news. However, this does not mean that investors and traders should short-sell the stock now. The reason is the potential for a short squeeze on even the slightest bit of good news. A short squeeze in Netflix stock could carry it much further to the upside than you can imagine.
Right now, the stock is a “don’t touch” for both investors and traders. The volatility in this stock, and results from competing streaming services, will provide plenty of trading opportunities in the coming months from the long side and the short side.
There will be an investment opportunity only if competing services from Disney and Apple fail to perform as anticipated.
FAANG stocks
Since FAANG stocks are overweight in many portfolios, investors ought to keep a careful forward-looking watch on the landscape as well as on the price action in Apple, Amazon, Google and Facebook shares.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.
