113%. 42%. 35%.
Click to Enlarge What do these three percentages have in common?
They are the year-to-date performances of three of the most highly recognized highflying tech stocks out there: Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOG, GOOGL) and Facebook Inc (NASDAQ:FB).
And yes, if you think that 35% and 42% performances aren’t so strong that they become worrisome, I’d say I agree. So you know, I actually remain constructive on all three stocks longer-term, and would look to buy them at lower prices.
However, my concern with these tech stocks has to do with their current stock charts — namely their ascents are too steep, and at these rates, they’re simply not sustainable.
You see, the recent 17% rally in the Nasdaq-100 off the higher lows in September came in good part thanks to the rally in these three tech stocks (and a few other heavyweights). In other words, only a handful of stocks did the heavy lifting while other stocks lagged. Regardless of whether market breadth improves in coming weeks, these three stocks have unsustainably steep slopes, which means proactive investors should take some profits, sell out-of-the-money call spreads or make near- to medium-term bear bets.
Here’s a closer look at how to play these three soon-to-be-shorn tech stocks.
Hot Tech Stocks Headed for the Wall: Amazon.com, Inc. (AMZN)
Click to Enlarge Amazon (AMZN) has more than doubled in 2015 in good part because a) the stock represents one of the few believable growth stories out there that the investing public is aware of and b) thus something fund managers can chase sky-high.
Of course, this will last until it doesn’t, which is to say that gravity inevitably will kick in and mean-revert AMZN stock lower.
The slope of the stock’s line on the below chart says it all as the rally has consistently gotten steeper throughout the year and now is simply going vertical. Sadly, for those that are chasing Amazon higher, it most likely will not end well as stocks that rally too steeply are without exception (buyouts and other corporate merger activity not included) doomed for an above-average mean-reversion process lower.
After each quarterly earnings report this year, AMZN stock gapped higher and rallied, which soon thereafter led to a consolidation period of the sideways variety. This allowed Amazon to take a breather and let the next (steeper) up-leg to ensue. The latest post-earnings rally now has Amazon shares at overbought readings from a MACD perspective (lower part of the chart) last seen in … well, never.
Active investors would be wise to take at least partial profits, use covered calls or out-of-the-money call selling strategies to protect and profit from a mean-reversion move lower.
Hot Tech Stocks Headed for the Wall: Alphabet Inc (GOOG, GOOGL)
What is most concerning about this stock is its consistent bid-only rally for the most part since September. Here too, institutional and some retail investors were forced to chase a “good-momentum” stock higher after earnings, taking the slope of its line vertical.
The post-earnings rally that began on Oct. 23 resulted in a breakout of a multimonth consolidation period and is thus technically sound as well, just not at this rate.
Here too, I’d remind you to embrace, but don’t chase.
Also note how far removed GOOGL stock now is from its red 200-day moving average, as well as the fact momentum is diverging from price. In other words, while price continued to rally in October, momentum as per the MACD oscillator long topped this summer, resulting in a lower high in the MACD.
Traders and active investors should sell covered calls or out-of-the-money call spread with a couple of months of expiration left, or outright short GOOGL. A mean-reversion move back toward the $700-$720 area would be healthy.
Hot Tech Stocks Headed for the Wall: Facebook Inc (FB)
The same dynamics that we saw in GOOGL stock and AMZN stock also apply to FB stock, which is to say that fund managers relentlessly chased it higher in fear of missing out and in a pure herd mentality stampede.
Facebook saw a breakout of an already steep slope in July, which then led to a quick but sharp corrective process in August. This essentially neutralized overbought readings and allowed for the next rally higher in August. By the time Facebook’s earnings report came about last week, the stock had already rallied significantly off the September lows and had broken past diagonal resistance from the summer highs.
In other words, last week’s up-gap after Facebook’s latest earnings report took its slope even steeper and to the very upper end of its already near vertical range since September.
Not surprisingly, this now has FB stock also extended above its 200-day moving average and at risk of at least a moderate mean-reversion move lower.
Sell call spreads or covered calls here. If you’re not privy to options, sell Facebook short in a controlled amount with a first downside target near $100.
Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.