Mean reversions nearing the end
October 28, 2022 Leave a comment
The big mean reversion back to the 200 week moving average has been underway.
While somewhat ‘smaller’ growth stocks did it much earlier and sharply, I have been highlighting the FAANNGM stocks as the ones to watch due to their hugh weighting and skew in the S&P 500 and Nasdaq indices.
The FAANNGM acronym accounts for the companies Facebook, Amazon, Apple, Netflix, Nvidia, Google and Microsoft.
I also included Tesla in some of my commentary due to its $1.4 trillion market capitalisation also adding to this concentration at the top.
This week, Google (Alphabet) traded back down to its 200 week moving average.
Microsoft is nearly there.
Amazon and Nvidia did it several weeks ago.
Netflix and Facebook (Meta) plunged through that level many months ago.
But Apple and Tesla haven’t done so.
While there isn’t a rule that suggests they need to fall all the way to their mean but the stretched levels which they were trading at told me to either sell or not chase them higher…..because gravity does exist.
Incidentally, the Nasdaq 100, the Philadelphia Semiconductor and S&P 500 indices also reverted back to its 200 week moving average (WMA) over the past month, as have the Small-Cap, Mid-Caps, Banking, Transportation indices.
We have seen all the ‘rubbish’ or over priced and zealous technology stocks tank first, followed by many other sectors including the industrials, then notable indices caught up with the decline and the last to follow are the originally identified culprits, being the FAANNGM stocks.
Pundits are all waiting for some indication of a market capitulation.
Could that occur when Apple and Tesla reach their 200 week moving average?
That may only matter if you are owning or trading Apple or Tesla.
Many indices are at higher prices today than when they touched their 200 WMA back in June or September 2022.
This story had a lead up which I began writing about in 2021.
3 days before the S&P 500 peak, I wrote this note which highlighted the extreme percentages that the indices and in particular the FAANNGM stocks were trading at.
https://mailchi.mp/karriasset/a-distorted-sp-500-amongst-extreme-peaks
In the next newsletter, I illustrated the damage already being done (at that time) amongst the lesser technology starlets and warned of that spreading to the bigger boys.
This article from January 2022 discussed how recently stratospheric FAANNGM stocks where looking weak and about to break below important support lines.
https://mailchi.mp/karriasset/there-is-gravity-in-the-stratosphere
This article written days later in February 2022, reiterates the story about the 200 week moving average being something to watch in the pending reversion to the mean.
Now that these mean reversions have occurred or are close to doing so, it doesn’t automatically render them a Buy suggestion.
There is more analysis to be done and basis required for such a recommendation
Clients will soon receive commentary with my views about what to consider next.
October 28, 2022
by Rob Zdravevski
rob@karriasset.com.au
rob zdravevski's blog 