The FANG Health Scare Ends With a Bang

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All year, people have wondered if something was wrong with the market: volatility was gone, stocks hardly ever moved. On Friday, they moved, though maybe not in the direction everyone was expecting.

Not content with all the tiny gains that were lifting equities toward the best year since 2013, traders emboldened by a scorching dose of tech earnings sent the Nasdaq 100 Index to its biggest rally in 19 months. About $185 billion was added to the market cap of the five largest companies alone, a rally reminiscent of the glory days of the tech bubble.

The surge ended a brief bout of nerves caused by a run of down days in technology megacaps. It left the Nasdaq 100 up 28 percent in 2017, its best performance relative to the S&P 500 Index since the start of the bull run.

A question bugging investors Friday was whether days like these become a sort of advertisement for equities that pushes the market into a euphoric phase, one that marks the beginning of the end of the bull market. To Frank Cappelleri, senior equity trader at Instinet LLC, such thoughts are a little overbaked so soon after everyone was obsessing over a lack of volatility.

“When you talk to other traders, you hear a lot that it’s quiet,” Cappelleri said from New York. “Volume is low, and in the conversations I’ve had with people outside of the industry, there’s not a lot of chatter about it compared to ’99 and 2000. There’s not a lot of emotion tied to it. Not elation, not jubilation, it’s still quiet.”

Even so, if you were looking for evidence of distortions, it wasn’t hard to find. So large was Friday’s rally in the biggest companies -- Facebook, Amazon.com, Alphabet, Microsoft and Apple -- that without them the S&P 500’s gain went from 21 points to almost zero. The one-day divergence between the Nasdaq 100, where those firms are almost half the weighting, and the broader market was the widest since 2009, Bloomberg show.

Little by little, gains in stocks are narrowing. A version of the S&P 500 that strips out market value bias trails the regular version by 3.7 percentage points this year, thanks to weakness in smaller companies.

That phenomenon is a reprise of the first six months of 2017, when the FANG group was responsible for about one-third of the broader market’s advance. Back then, speculation was rampant that a selloff in the leaders would torpedo the bull. A problem for the thesis now is that the stocks did sell off, dropping four straight weeks in August, while the S&P 500 kept on going up.

In fact, Friday’s market was a mirror reflection of a day that before this week had been the year’s most notable session: another Friday, June 9, when the Nasdaq fell as much as 3.9 percent while the S&P 500 sat still. The plunge helped send tech stocks to their only down month of 2017. Today, they’re on the brink of their biggest advance.

And if breadth is narrowing, it’s nowhere near as pronounced as it was before the tech bubble burst. During the 12 months leading up to the peak in march 2000, the equal-weighted S&P 500 lagged behind the regular version by 12 percentage points.

“There was a period of time in the market when they were the primary drivers, but that’s not the case now,” said Krishna Memani, chief investment officer at Oppenheimerfunds Inc. “Growth stocks haven’t really done much of late to begin with The primary driver is synchronized global growth, and better earnings across the board.” 

Gains are less concentrated when the lens is pulled back. While the Nasdaq 100 is up 3.9 percent in October, the Dow Jones Industrial Average has climbed 4.6 percent. Computer companies that trace their lineage back more than a few years have also been rallying: the Philadelphia Semiconductor Index is up 7.8 percent this month, and Intel Corp., stalwart of the Internet bubble, is up 17 percent.

“This is not just FANG names, this is broadening to what a lot of people would refer to as old technology,” Charlie Smith, chief investment officer who helps oversee $2.3 billion at Fort Pitt Capital Group in Pittsburgh, said by phone. “We’re starting to reflect a true improvement in the economy and capital spending, and a broadening of the market.”

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