Movie Lover’s Intermission (NFLX,JPM)
If there’s one thing we’ve come to rely on over the last couple of decades, it’s the resiliency of tech – or at least the resiliency of the tech investor, a love junkie so consumed with his heart’s one desire that he keeps coming back – even after taking repeated beatings.
We don’t make this stuff up, folks.
The dot.com bubble burst at the turn of the century; the Lehman Bros. debacle squared big tech (along with everything else) a decade back; and over the last year, we’ve seen several dumps of between 20% to 30% on all the FAANG stocks.
But does anyone care…?
Tech investors seem nonplussed. They’re a loyal lot. And that’s fine.
But we here at The Modern Bull are somewhat different. We don’t have a great deal of hope for the longevity of things tech-y, but we do view them favorably as vehicles for robust and profitable trades. Hence a company like Tesla, for whom we bear no love whatsoever, we still view as a high beta means of realizing our financial goals.
That said, there are now several reasons to be worried about big tech, even while it continues to receive vastly disproportionate flows of investor cash.
Have a look –
The first reason relates to just how concentrated the ownership of the FAANG stocks has become, with just those five names comprising an extraordinary 25% of the NASDAQ Composite Index. Hard to believe, too, but according to a recent letter from Bank America, the big tech names accounted for a full 75% of the S&P 500’s return in May.
The concentration of ownership in these stocks is truly frightening. A single, unexpected, negative earnings surprise or another confidence-breaking event – as Facebook is facing at present – even talk of legislative or regulatory efforts to curb these companies’ influence or earning ability, could quickly reduce the entire market to ash.
Apple’s Outsized Role
That said, the cherry on top of the tech investor sundae of late has been Apple, whose most recent, monumental buyback announcement, coupled with Warren Buffett’s increasing interest in the firm, propelled the company’s stock higher by a gargantuan 15% in May. That performance alone was responsible for 23% of the S&P 500’s return in that month, and that, too, should have folks worried.
We’ve long discussed how we believe the endgame for this greatest of all bull markets will play out, describing how the final push to the top will inevitably ride the backs of the sexiest tech names, while all other stocks will fall into the nether realms of ignominious disgrace.
We even went so far as to dub the current bull run the “Facebook Market”, and we stick by our guns that as goes Facebook, so goes the equity market. Which is all a bit disconcerting if you’ve been following the news lately – because Facebook looks every bit the schnook-face at present, as its misdeeds and false promises keep piling up publicly for all to see.
All Eyes on FB
We won’t bother with a catalog of the company’s infamy here. Suffice to say that selling users’ personal data to a) Microsoft, b) Samsung, c) Apple Inc., d) Nissan, e) RBC Capital, f) the Chinese, g) Amazon, h) Blackberry, i) Cambridge Analytica and Gawd knows who the hell else, does not sit well with legislators and users, not to mention the potential trouble on the horizon for the company regarding tax liabilities and monopoly/trust issues both domestically and abroad.
In short, it’s only a matter of time before government steps in and denudes these sons of borches for being the dirty little pranksters they are; at which point the jig will genuinely be up – for them, and for those who believe in them.
And yet the buying continues…
How to account for the continued, massive buying of these stocks?
Well, one important reason for the recent melt-up is the surge in share buybacks, as mentioned above in the case of Apple Inc.
In fact, we’re now in the middle of the headiest self-induced purchasing panic that the market has ever seen, as the chart below, courtesy of Merrill Lynch, shows –
This is simply corporate willy-ratcheting gone mad!
Since the bull market began, we have yet to see buyback commitments on a scale like today’s. It’s also caught the attention of the SEC, which is now investigating the phenomenon with an eye to outlawing insiders selling shares after buybacks are announced, a strategy that has captured billions in profits for all those who know well in advance when the buying programs will be implemented.
It can’t go on forever.
It will persist until the nation is completely overcome with a sense of hubris and, convinced of its own greatness, comes to the conclusion that never again will markets fail those who invest for the long term…
Then Wham-O! The blood will begin to spill.
There will be sharp ups and downs on the way to that ultimate top, and it’s one of those zags that we intend to play now.
Our trade for the week involves the most high flying member of the FAANG group, Netflix (NASDAQ:NFLX), a stock that has seen a ridiculously exaggerated 100% move in just the last five months. We’re planning to trade it against one of our favorite financials, JP Morgan Chase (NYSE:JPM).
Take a look first at the daily chart for Netflix –
The overbought RSI readings (in green) are our first clue that we’re close to an intermediate top for this tech-market lovebird. And with both weekly AND monthly RSI indications also striking well into the overbought over the last few months, we can only suggest a sideways to lower trajectory for the movie seller in the months ahead.
Against that, we see increasing revenues for all the banker/brokerages going forward. The end of the cycle is typically very favorable to the financial sector, and we expect this one to be no different.
With that in mind, have a look at how NFLX has fared against JPM over the last year –
The disconnect here is not even worthy of comment. Suffice to say that if there’s a pullback, we’ll see a disproportionate slide from our tech brother, while the bankers hold their own. Conversely, it’s likely the upside on NFLX is now limited.
Consider, too – we could see NFLX dropping to the $225 range, where it has a significant gap to fill (red circle). That would constitute a nearly 40% decline!- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Wall Street Elite recommends you consider buying the JPM June 21st (2019) 100 CALL for $16.35 and selling the NFLX June 21st (2019) 480 CALL for $19.95. Total credit on the trade is $3.60.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
More than that, the JPM CALLs are ten points in-the-money, while the NFLXs are 120 out-of-the-money!
With kind regards,
Hugh L. O’Haynew