FANG Stocks Flying As Nirvana Spreads In The Tech Sector

The following was originally published on TradeStation Market Insights

Big technology stocks are ripping as a combination of favorable conditions sweep markets.

The NYSE FANG+ Index ($NYFANG) is up more than 3 percent since Friday, putting it on pace for the biggest weekly gain since early January. The index, named after high-profile stocks Facebook, Inc. FB, Amazon.com, Inc. AMZN, Netflix, Inc. NFLX, and Google parent Alphabet Inc GOOG GOOGL has almost completely erased its sharp selloff in the fourth quarter.

Several catalysts seem to be at work. First, things have turned more positive after a lot of bad news was priced in. FB, for example, is delivering growth as its Stories format gains traction with advertisers. Netflix is raising prices. Apple is moving deeper into services as iPhones slow. Alphabet just launched a major cloud-based video game service.

NYSE FANG+ Index ($NYFANG), highlighting start of the fourth quarter's decline.
There’s also been a major rebound in semiconductors as orders recover from a winter slowdown.

The macro environment has grown more favorable as well, with modest economic growth and low interest rates. Why’s that good for technology stocks?

One reason is that super-fast economic growth makes investors want to own other kinds of stocks, like industrial companies and financials. But when the economy is growing at a 1-2 percent clip — like right now — technology companies with expanding businesses often provide clearer growth stories.

Low Rates and Slow Growth

Now let’s consider how low interest rates can help technology stocks, which often trade a higher valuations.

If you flip the price-to-earnings multiple upside down and you have another metric called “earnings yield.” It’s the opposite, or reciprocal, of P/E ratio. Companies with high P/E ratios have low earnings yields.

That, in turn, makes it easier for investors to hold them when rates are low. In a fast-growing economy, big money managers might not stomach high multiples and low earnings yields. But when growth is mediocre, what else can they buy?

Speaking of mediocre, that’s a good way to describe ADP’s private-sector payrolls report and the Institute for Supply Management’s service index yesterday. Both fell more than expected to their lowest levels in over a year. Earlier in the week retail sales and durable-goods orders also failed to impress.

In conclusion, you have a slow, but-still growing economy. You have a dovish Fed, low volatility and a rebound in chip orders. It’s pretty much Nirvana for technology stocks — at least for now. Just don’t forget that quarterly results start hitting in mid-April.