FAANG basket is overbought and may lead market correction

Introduction

FXCM’s FAANG basket includes an equal weighting of 20% each in:
– Meta Platforms Inc (Facebook) – META.us
– Amazon.com Inc – AMZN.us
– Apple Inc – AAPL.us
– Netflix Inc – NFLX.us
– Alphabet Inc. Class C (Google) – GOOG.us

Weekly FAANG Chart

The FAANG basket had a punishing 2022 (between blue verticals). It charted a series of lower peaks followed by lower troughs, which is indicative of a downtrend. From January 2022’s open to December 2022’s close, the basket lost a staggering 43%.

However, 2023 has been a different story. The FAANG basket has rocketed ahead charting a higher trough (HT1) followed by a higher peak (HP1). This puts the basket into uptrend for this year. Moreover, its capital appreciation year-to-date is near 43%.

FAANG‘s Influence on NAS100

Source: www.tradingview.com

• The black line chart is FXCM’s FAANG basket and the red line chart is FXCM’s NAS100 CFD.
• The y-axes have been scaled to 100.

The chart on the left shows the 2022 period on a monthly scale. The chart on the right shows 2023 year-to-date on a daily scale. On the left, the FAANG basket led the NAS100 down and on the right, it led the NAS100 up.

The FAANG basket effectively leads the NAS100 index

NAS100 Shows Market Leadership

Source: www.tradingview.com

The above chart’s y-axis is indexed to 100 and shows:
– NAS100 – red line chart.
– SPX500 – blue line chart.

The bottom indicator is the correlation coefficient between the NAS100 and SPX500. Its reading is a robust 81%.

The NAS100 exhibits leadership and has outperformed the broader market index. However, there is an obvious positive relationship between the two as per the correlation coefficient.

The Proposed Chain of Causality

• FXCM’s FAANG basket leads the NAS100.
• It led the NAS100 down in 2022 and has led the NAS100 up in 2023.
• The NAS100 leads the broader SPX500, and the two indexes have a strong positive correlation.
• Given that the FAANGs lead the NAS100, and NAS100 is positively correlated to SPX500, the FAANGs will also exert influence on the broader market.

Weekly FAANG Overbought Condition

The above shows the FAANG weekly chart again but this time we have added an RSI indicator underneath. The RSI is above 80 and is regarded as overbought (black ellipse). Generally, the RSI does not stay overbought for long, spending most of its time between 20 and 80. This suggests that the FAANG basket is either due a pullback or a move sideways so that its inherent «froth» is expelled, and the RSI normalises.

Conclusion

The above articles suggests that the FAANG basket influences both the NAS100 and the broader stock market. It also indicates that FXCM’s FAANG basket is overbought and due a pullback. This may be for several reasons e.g., general profit taking or a risk-off news item that dominates for a while. If this happens, it is likely to influence the NAS100 and the SPX500. I.e., if the FAANG basket sells down, and its RSI normalises, it is likely to ripple through to broader market sentiment.

Image by Michal from Pixabay