Beyond the FAANG Stocks - the FANG+ Index Is the Next Big Thing

Last week, I talked about the headline-grabbing FAANG stocks - Facebook Inc. (Nasdaq: FB), Apple Inc. (Nasdaq: AAPL), Amazon.com Inc. (Nasdaq: AMZN), Netflix Inc. (Nasdaq: NFLX) and the "new Google": Alphabet Inc. (Nasdaq: GOOG) - which comprise more than a third of the Nasdaq 100.

Of course, everyone is looking for the next new thing to play with. So why not capitalize on the biggest stock names out there to come up with a new tradable product?

That's exactly what the Intercontinental Exchange (ICE), the parent of the NYSE, did last September when it launched the FANG+ Index (NYFANG).

But there's a twist.

The index adds another five actively traded technology growth stocks (translation: popular in the financial media) to the mix. Besides the big five, FANG+ contains Nvidia Corp. (Nasdaq: NVDA), Baidu Inc. (Nasdaq: BIDU), Alibaba Group Holding Ltd. (NYSE: BABA), Tesla Inc. (Nasdaq: TSLA), and Twitter Inc. (NYSE: TWTR).

But that could change, depending on what's hot. ICE will review the fund's makeup every quarter to ensure it contains only the hottest of the hot names.

As I did last week, I'm going to dive into the "second five" of the index, using my Best in Breed (BiB) analysis.

Today we'll look at the best and worst of the lot, and we'll analyze the rest next week. Let's get started...

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On a Monster Run Since Early 2016

Exactly how big of a run has Nvidia, my favorite stock in the group, been on?

How does a 10-fold increase since February 2016 sound? And with that kind of rally, Nvidia's relative strength versus the Invesco QQQ Trust (QQQ) shows huge outperformance.

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FANG+ Index

The stock has been on a tear in August, moving higher for seven straight days to break above its 50-day moving average, which is now turning higher.

Nvidia

Though the chart is less than scintillating, here's why I like Nvidia. First, it has earnings coming up on August 16. The stock has done very well after recent earnings reports, gaining an average of 8% through the Friday of earnings week over the past 13 quarters.

Second, despite Nvidia's impressive longer-term rally, analysts have been slow to jump aboard the stock's bandwagon. In fact, just over 50% of covering analysts rate the stock a buy.

That leaves plenty of room for future upgrades, especially if the stock enjoys another post-earnings surge.

"Chinese Google": in Decline on All Fronts

Turning to the worst side of the ledger, I'm not a fan of Baidu.

Last week's earnings report missed the mark on two of the big three numbers, failing to meet expectations on revenue and guidance (earnings beat estimates).

The stock reacted with a crushing 11% drop the next day, which pulled the shares far below their 200-day moving average.

What I find most discouraging about Baidu, though, is that the stock has slipped further after the initial reaction. As I write, the shares are 3% below their post-earnings day close.

With no chart support in sight other than a couple of bottoms at 214 and 208, it's hard to view this stock in a bullish light.

Baidu

All major trendlines are now in decline, including the 200-day. And that's a problem.

The last time the 200-day rolled over after a prolonged uptrend was in May 2015, after which the stock plunged more than 40% during the subsequent five months.

Strangely, short interest on Baidu is minimal, so don't expect any help from short covering. Perhaps odder is the fact that nearly three-quarters of covering analysts rate Baidu a buy. I'm not sure what chart they're looking at. If they see what I'm seeing, I wouldn't be surprised to see a few downgrades come Baidu's way.

If you're looking for a trade, I'd pair up these stocks - long or a call on Nvidia and short or a put on Baidu. If you'd rather avoid the uncertainty of earnings, wait until after Nvidia reports on August 16.

Keep in mind, however, that recent post-earnings moves have been solidly bullish. If you prefer options, I'd look at at-the-money options in the October series or later to let the relative strength difference play out.

I'll be back early next week with a look at the remaining three FANG+ stocks - Alibaba, Tesla, and Twitter. See you then.

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About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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