The FANG stocks are trading in the red, and that could be bad news for the broader stock market. Here’s why.
More government scrutiny and the threat of regulation—or even breakups—have weighed the FANG stocks down this week.
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And according to one analyst, these stocks have formed a precarious chart pattern that may signal pain ahead, not just for this group, but for the broader stock market as well.
Bank of America Merrill Lynch chief equity technical strategist Stephen Suttmeier tracked the performance of the four FANGs—Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), Netflix (NASDAQ: NFLX), and Google-parent Alphabet (NASDAQ: GOOGL, GOOG)—against the broader S&P 500 since December 2017.
Suttmeier identified a “head and shoulders” pattern, which typically signals a top, that has formed in the FANG stocks, similar to the same pattern that appeared in these stocks last year before the group—and the rest of the market—took a dive lower.
“Early-October 2018 saw Facebook, Amazon, Netflix and Google (FANG) break below a short-term uptrend after forming a head and shoulders top,” Suttmeier wrote in a note Wednesday. “This was a canary in the coal mine for the late-2018 U.S. equity market correction.”
“Past weeks have seen the emergence of a similar head and shoulders top on FANG, supported by a similar breakdown relative to the S&P 500, confirming a pullback for the S&P 500,” he wrote.
The FANGs formed this most recent head and shoulders pattern after hitting highs in March, then a second higher high in April, and then a lower high in May.
According to Suttmeier, the return of this pattern is bad news for the rest of the market.
“A failure for the group to retake resistance vs the S&P 500 supports the bearish breakdown, signaling risk for the broader market,” Suttmeier wrote.
The S&P 500 has rallied nearly 20% since its late December low, though the index is down more than -4% over the past month. More recently, real estate and utilities have been the best-performing sectors, signaling that investors are piling into safe haven assets as the trade war rages on and investors worry about the health of the U.S. economy.
While the worries that plagued the FANG stocks late last year have stuck around, the more recent threat of increased government regulation has increased investor anxiety. It has been reported that the Justice Department is working on an antitrust case against Google, while the FTC has reportedly taken up oversight of Amazon and Facebook and is considering how these companies are harming digital competitors.
“The whole component of what’s going on in tech right now goes back to the rhetoric of Sen. Elizabeth Warren threatening to break up tech giants,” said Jeff Kilburg, CEO of KKM Financial. “We thought that was just rhetoric. But now with this news hitting, it’s really impactful.”
Facebook and Google have been hit the hardest this week and are down -8% and -6.57%, respectively.