The Week Ahead in Stocks Jun 25th

A target may be an opportunity to exit a trade but it does not always follow that it is time to reverse.

For a brief moment last Wednesday, 4 of the 5 FAANG stocks were trading at new all-time highs, and all were above above the March highs. All have now met the medium term targets set earlier this year.

Some stocks – notably Netlfix (NFLX) – have blasted right through even our revised upside targets.

We may not have called every smaller back and forth in the lower timeframes, but our bigger picture view has been accurate enough.

So now targets have been met, are we now looking for a top and readying shorts? Not quite. Last week we pointed out a valid set-up for a top in the Nasdaq, but said we are looking for bullish alternatives.

This is still the case. As one channel breaks, another develops. It’s something we have seen over many times over the course of this bull market.

What we may see is some rotation out of high flying Tech stocks and some catch up in other unloved ones. The blow off action in FAANG has been conspicuously lacking elsewhere. Dividend stocks are unattractive in a rising rate environment, defensive stocks are avoided in favor of growth, and industrial stocks like Boeing (BA) and Caterpillar (CAT) are taking a hit on the back of trade tensions. Trades which were once sure-things like Emerging Markets (EEM) are now anything but.

FAANG stocks are desirable because they continue to show stunning revenue growth, but this isn’t a recent catalyst. Earnings season was very choppy and most earnings rallies in April and May were sold into. The latest stage of the blow off has more of an air of desperation about it. Funds aren’t buying NFLX for the PE ratio of 275 and an optimistic DCF-based target of $104. They are buying because they think it will go to $500.

But this behavior won’t last indefinitely, and when it reaches extremes – like it seemed to last week – it often reverses the other way. This week we are looking for signs of a temporary rotation back into the DJI. Perhaps we are already seeing it as the Nasdaq/DJI ratio turned lower last week after briefly breaking its channel.

BA will be a key stock and the $319-325 area is worth watching for reversals as this could signal a shift.

Cracks in this bull market have been around for a while. And they will continue to grow. But it is only when they are big enough that we expect all stocks to fall through them.

We will of course be monitoring all FAANG stocks, and other Hot Stocks in the week ahead.

Good luck and good trading.

Andrew McElroy
Chief Stocks Analyst