Market Overview

How The FANG Stocks Trade With Each Other And The Rest Of The Market

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How The FANG Stocks Trade With Each Other And The Rest Of The Market

For most of the past decade, the FANG stocks -- Facebook, Inc. (NASDAQ: FB), Amazon.com, Inc. (NASDAQ: AMZN), Netflix, Inc. (NASDAQ: NFLX) and Alphabet, Inc. (NASDAQ: GOOG) (NASDAQ: GOOGL) -- have led the market higher. Benzinga took a close look to see just how correlated the FANG stocks are with each other to identify potential trading opportunities this earnings season.

Closer Look At Correlation

In the past six years, each of the massive growth companies has more than doubled the 80 percent return of the overall S&P 500, with gains ranging from Alphabet’s 197-percent rise to Netflix’s 1,350-percent liftoff. While it’s easy to see the trend for all the FANG stocks has been bullish for years, day traders care much more about short-term correlations.

The Portfolio Visualizer daily return correlation matrix for the FANG stocks, the Technology Select Sector SPDR Fund (NYSE: XLK) and the SPDR S&P 500 ETF Trust (NYSE: SPY) shows a relatively high level of correlation in daily returns among the group dating all the way back to the beginning of 2012.

Most Influential FANG Stocks

The highest level of correlation at 0.92 is between the XLK ETF and the SPY ETF. That’s not surprising considering the tech sector has been a market leader throughout most of the past few years.

Not surprisingly, all four FANG stocks have high correlations with the XLK ETF as well. These stocks, particularly Amazon and Alphabet, have held extremely high weightings in the XLK ETF for most of the past decade.

Alphabet also has a relatively high 0.64 correlation with the SPY ETF, suggesting that a good earnings report from Google’s parent company likely means a good day for the U.S. stock market. Netflix has the lowest daily correlation to the overall market at 0.37.

Alphabet will report fourth-quarter earnings Feb. 4.

Most Correlated FANG Stocks

Looking at only the FANG stocks themselves, the two stocks most likely to trade in tandem on earnings day are Amazon and Alphabet, which have a 0.59 correlation. Traders likely see these two tech giants as so important to the general market sentiment that a good or bad day for one is important for the other as well.

Finally, the least correlated FANG stocks are Facebook and Netflix. Aside from their positions as high-growth tech names, Netflix and Facebook have relatively little overlap in their businesses, and Netflix isn’t large enough just yet to have as much as an influence over the entire tech sector as the other three FANG stocks.

Related Links:

Nomura's Case For Adding Square To The FANG Trade

Analyst: FANG Stocks Growth Fundamentals Remain Relatively Strong

Posted-In: FANG Portfolio VisualizerLong Ideas Top Stories Tech Trading Ideas Best of Benzinga

 

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