How to Fight a FANG Crash

Tech stocks are once again leading the market.

The biggest, most recognizable names in the sector have shaken off the February correction and continue to power to new highs this week. Some of the strongest performers of the bull market, including the furious FANGs (Facebook, Amazon, Netflix and Google), have already managed to stockpile incredible gains during the first quarter. In fact, Facebook is the only name out of this elite group that isn’t sitting on double-digit gains in 2018.

But when your company’s stock is up an astounding 70% year-to-date, you’re going to attraction some serious attention.

Not all of it will be positive…

Netflix (NASDAQ:NFLX) is coming under intense scrutiny right now as the content streamer’s shares go parabolic. The Financial Times is the latest media outlet to attempt to poke holes in the picture-perfect Netflix growth story with a thoughtful takedown appropriately titled “This is nuts, when does Netflix crash?”

The FT’s take is simple: Netflix is too optimistic on its growth projections and the company is spending way too much money on new content.

“It might be easier to believe in the growth story if 48 million American households weren’t already signed up for the delights of Stranger Things, and marketing spend wasn’t growing faster than sales. It will jump to $2 billion this year, from $1.3 billion in 2017, which suggests winning customers is getting harder even if, like Netflix, we believe 700 million households around the world are potential customers,” FT muses in its takedown. “Buying into the dream would be easier if the company weren’t also competing with Amazon, HBO and, in the not too distant future, Disney.”

Notorious short-selling firm Citron Research was quick to approve the FT’s take Monday morning on Twitter, adding that Netflix’s newfound $17 billion in market capitalization so far this year is probably unsustainable. Citron then gave traders the green light to short the stock back to $300 (NFLX shares began the week at $333, an all-time high).

To be fair, Netflix has been one of our favorite bull market cash machines. The stock delivered a big, obvious breakout in early January that triggered the latest wave of its incredible rally.

NFLX jumped almost 5% to begin 2018 trading thanks in part to an analyst upgrade, who called the service “miles ahead of its peers.” We jumped in as the breakout shot shares above $200 for the first time in more than two months. Just a couple of weeks later, we were able to cash out for gains of more than 40%.

But the high-profile hits are now taking a small bite out of Netflix shares this week. The stock dropped more than 3% on Monday despite another record high close for the Nasdaq Composite. Yet thanks to its incredible first-quarter rally, the 3% drop barely registers on a one-year chart.

Netflix Epic Breakout

Are the Netflix bears right this time?

I honestly don’t know. But I wouldn’t rush out and short Netflix right now (or any of the big tech stocks, for that matter). Sure, the stock is expensive and overbought. But if there’s one thing this bull market has proven over the past year, it’s that these are two concerns that aren’t at the forefront of most traders’ minds.

Remember, there are a lot of folks who were just caught on the wrong side of the market as stocks recovered from the February correction. That means we’re probably going to see a lot more of these bearish reports on high-flying stocks like Netflix.

Bickering between the bulls and bears could cause some short-term volatility. But ultimately, these popular tech stocks shouldn’t lose their role as market leaders anytime soon. Sell these monsters short at your own peril…

Greg Guenthner

You May Also Be Interested In:

Greg Guenthner

Greg Guenthner, CMT, is the editor of Opening Bell Fortunes and Seven Figure Signals. He has been with Agora Financial/Seven Figure Publishing since 2005. In 2019, the average position in Greg’s Sunrise Fortunes portfolio outperformed the S&P 500 by 1.65x.

View More By Greg Guenthner