The acronym “FANG” stands for Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) — formerly called Google — and is sometimes expanded to include Apple (NASDAQ:AAPL) as a second “A” (i.e. FAANG). The short-hand expression was originally coined by market pundit Jim Cramer and, if a few more stocks such as Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA) and Adobe (NASDAQ:ADBE) are added, it would make a good index of some of the best-performing tech stocks in the market.

Traders care about the FANGs because they are considered a proxy for risk appetite. Those stocks tend to have high valuations with very high growth estimates. If the bulls are in control, the FANGs should be doing well. Similarly, if the FANG stocks were to falter, traders should assume that momentum is fading and stocks may be at risk.

If the FANGs lead the market, then NFLX’s report after market close on July 16 was a little unnerving. Actual financial performance was very good, but growth in new subscribers was lower than expected, as the company reported nearly a million subscribers less than had been forecast. Management blamed the miss on issues with internal forecasting versus some other weakness in the business.

We are inclined to believe NFLX’s CEO in this case because it isn’t the first time we have seen the same issue. This happened twice in 2016, and the aftermath was very similar. Initially, investors sold the stock, but the low was more or less established by the post-earnings reaction. Tuesday’s action in NFLX’s stock seems to be following this same pattern, as shares reclaimed 10% of their value by the end of the day.

Netflix’s price action is encouraging at this stage of earnings season. Despite the losses after the release, the renewed buying pressure in the immediate aftermath was a good sign for NFLX’s peer group, and therefore for the major indexes. For example, GOOGL and AAPL are both at a point where momentum could begin to fade. However, a resurgent NFLX makes a continued uptrend within the FANGs more likely. As you can see in the next chart, new highs in the FANGs tend to be highly correlated with new highs on the major indexes.

FANGs (candles) versus SPX (blue): Chart source — TradingView.com

This isn’t just a technical argument about potential upside. If investors are optimistic about FB and GOOGL, it’s a good indicator for advertising and consumer spending. AMZN’s new highs are also a clear indicator of consumer spending and consumer confidence, which is critical for the rest of the market to reach new highs. Despite NFLX’s volatility, the FANGs still seem to be solidly pointing towards rising prices in the market.

The Bottom Line on FANG Stocks

Strong performance in the bank reports and a recovery in FANG stocks is a good leading indicator for the rest of earnings season. Traders are still justifiably concerned about the impact of President Donald Trump’s “trade war,” but most of those effects are still theoretical at this point. Assuming growth can remain consistent and the tariff dispute is resolved in the short term, we expect the latter half of 2018 to look a lot better than the first six months.

You can learn more about identifying price patterns and using them to project how far you think a stock is going to move in our Advanced Technical Analysis Program.

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