Stinky Breadth: FAANG Masks Market Weakness Beneath the Surface
FAANG’s Dominance
FAANG is an acronym that stands for Facebook (now Meta Platforms (META)), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Google (now Alphabet (GOOGL)). The “FAANG” stocks rose to prominence over the past decade due to their strong price and fundamental performance and massive market caps. Since their initial rise, investors have often added to the group of stocks and have included the likes of stocks such as Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA).
Image Source: Zacks Investment Research
Pictured: META and the FAANG names are outperforming the general market by a longshot.
Though the market has thousands of stocks to choose from, these stocks have earned the hype and popularity and continue to be the overwhelming choice of retail and tech-oriented institutional investors. Despite their already massive size, these stocks continue to gain market share through innovation, high growth, and market dominance. To give you an idea of FAANG’s dominance, Microsoft, Apple, and Amazon now comprise around 30% of the market cap weighting of the Nasdaq 100 ETF (QQQ).
Mega-Cap Tech’s Outsized Performance
Because three in four stocks tend to follow the general market’s direction, in the 2022 bear market, most stocks fell – including FAANG. However, in 2023, FAANG stocks are once again outperforming – and the performance is becoming more profound. For example, Microsoft leaped 7% on earnings earlier this week. Meta Platforms is up more than 10% this morning following its report. Conversely, smaller growth-tech names such as Mobileye (MBLY), Impinj (PI), and Netgear (NTGR) are getting clobbered by 10% or more after their reports.
Stinky Breadth
The dichotomy between mega-cap tech stocks and traditional growth names is the largest in recent times. Does it matter, though? The short answer is yes, eventually, it will matter. Weak participation (also known as breadth), can be sustained in the short-term. However, eventually the stocks that are holding the market indices up will succumb to gravity and pullback. In other words, you shouldn’t trust an index’s move just because it is marching higher – a few large weighted stocks, such as Microsoft, can skew the results and mask weakness beneath the surface.
An Easy Way to Gauge Participation
There are many ways to gauge market breadth, including the advance/decline line, new highs & new lows, and the up/down volume. However, one of the easiest methods I have found is to simply compare an equal-weighted index to a market cap-weighted index. Below is a year-to-date performance chart of QQQ – the most popular tech ETF.
Image Source: Zacks Investment Research
While QQQ is up 17% in 2023, the Nasdaq 100 Equal Weight Index (QQQE) is only up a feeble 8%.
Image Source: Zacks Investment Research
In other words, currently, the market is being held up by just a few strong mega-cap stocks.
Takeaway
A signficant dichotomy exists in the market between QQQ and QQQE. Investors should not simply take an index’s performance at face value but rather take the time to compare it to an equal-weighted index. Breadth is an important concept to understand as a rally is only sustainable for a long period of time with strong participation. Remember, a few large-cap stocks can mask the performance beneath the surface.
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Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
Apple Inc. (AAPL) : Free Stock Analysis Report
Microsoft Corporation (MSFT) : Free Stock Analysis Report
Netflix, Inc. (NFLX) : Free Stock Analysis Report
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
NETGEAR, Inc. (NTGR) : Free Stock Analysis Report
Tesla, Inc. (TSLA) : Free Stock Analysis Report
Invesco QQQ (QQQ): ETF Research Reports
Impinj, Inc. (PI) : Free Stock Analysis Report
Alphabet Inc. (GOOGL) : Free Stock Analysis Report
Mobileye Global Inc. (MBLY) : Free Stock Analysis Report
Direxion NASDAQ-100 Equal Weighted Index Shares (QQQE): ETF Research Reports
Meta Platforms, Inc. (META) : Free Stock Analysis Report
