Laying the Groundwork
The FANG+ stock index is an equally weighted NYSE index that boasts one of the highest correlations to technology and related stocks.
The NYSE FANG+ index includes 10 highly liquid stocks that represent the top innovators across today's tech and internet/media companies. The index's underlying composition is equally weighted across all stocks, providing a unique performance benchmark that allows for a more value-driven approach to investing. While the performance of indices weighted by market capitalization can be dominated by a few of the largest stocks, an equal-weighting allows for a more diversified and represented portfolio.
The NYSE FANG+ Index has returned a 25.18% annualized total return from September 19, 2014, to October 30, 2018,* as compared to 14.45% for the NASDAQ-100®, 9.48% for the S&P 500® and 16.70% for the S&P 500® Information Technology Index.
FANG+ 5-Year Stock Charts
10 stocks comprise the NYSE FANG+ Index: Apple (AAPL), Alibaba (BABA), Amazon (AMZN), Baidu (BIDU), Facebook (FB), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Netflix (NFLX), NVIDIA (NVDA), Tesla (TSLA), and Twitter (TWTR)
These 10 stocks currently reflect total market value of $3.657 trillion. A 1% move in the index reflects approximately $37 billion in market value added or lost. Estimates currently place the U.S. stock market value at around $30 trillion. So we can see how these 10 stocks represent more than 10% of market value.
Unpacking the NYSE FANG+ Index Anomaly
"From where we stand the rain seems random. If we could stand somewhere else, we would see the order in it." - Tony Hillerman
The NYSE FANG+ Index is represented in the marketplace by two leveraged ETFs. The largest NYSE FANG+ Index ETF is the BMO REX MicroSector FANG+ Index 3X Leveraged ETN (FNGU) with $79.86M in assets. Over the past six months, a non-random pattern has emerged with very discernible characteristics. While I have been actively trading this pattern since the 2nd iteration, the question remains would you trade this after eight examples of a recurring pattern since June? Would you trade after only two prior patterns?
Perhaps the only random factor to consider is trying to time exactly when the non-random pattern will fall apart and how best to trade the anomaly. So let's jump into the anomalies and see if a correlation across several non-random looking patterns can help explain such a random forecast of what will happen next.
What factors may be contributing to this unusual stair-step downward with bimodal intervals?
Before I dive deeper into underlying contributors, it is worth noticing one strong deviation in the pattern above. The FNGU price dropped an extra 10/share from the end of September to the start of October. Previously, the pattern followed a very strict 10/share drop after every second test of the support level. This breach of pattern into October with a subsequent resumption of the pattern may have a logical explanation that is linked to another key anomaly.
As I break it down in more detail below, I will discuss and highlight some key correlations to the underlying 10 equities and the more unique correlation with declining liquidity in the marketplace. First let's unpack the most broad and obvious correlation to the technology since the FANG+ index boasts one of the highest correlations to technology and related stocks.
Using the Direxion Daily Technology Bull 3X ETF (TECL) shown above, we can start to examine some key correlations to the effects driving the FANG anomaly. Notice first the significant breach in pattern between September and October with TECL falling from 170/share to nearly 120/share, nearly 30% in early October. This Oct-Sept, the technology sector drop correlates highly with the FNGU decline in the same period that created a breach in the pattern shown above.
Secondly, I have placed a series of 1s and 2s that correspond to peaks in the price for TECL from October through December. I will explain this in more detail, but for now the 1s represent the first decline of the month from October through December. Yes, and the 2s represent the second decline of the month from October through December. These labels serve to combine another anomaly that I am closely following and actively trading.
The second anomaly I have previously documented as a VIX volatility anomaly in several research and trading articles:
In particular, as I detail extensively in the related articles and anomaly, the Sept/Oct event corresponds closely with the Federal Reserve reaching the cap on its balance sheet asset unwind program. As the VIX chart shows below, the CBOE Volatility index has reached much higher elevated levels since more Treasuries and mortgage-backed securities were rolled off the balance sheet at the maximum rate starting in October: This volatility anomaly is sending tremors across many stocks and indexes, especially those that are leveraged.
The SPDR S&P 500 ETF (SPY) shows the anomaly well on the largest ETF with high liquidity to give us a clearer price picture for analysis. You can see the same technical breakdown at the end of September to October. Next the series of 2s illustrate the second event spikes for SPY that correspond to the VIX volatility anomaly. Currently, the chart depicts a breakdown in support for the underlying S&P 500 index with the price falling below the support line around 262/share.
Trading the NYSE FANG+ Index Anomaly
Putting into operation some potentially profitable trades may be accomplished by leveraging the inverse of the FANG+ Index bull fund shown below.
The inverse fund to FNGU is the MicroSectors FANG+ -3X Invrs Lvrgd ETN (FNGD). The FNGD is the most straightforward trade to the FANG anomaly using an inverse chart to the FNGU pattern as shown below:
Most striking is that the upside potential on the FNGD chart appears to support a price target in the range of 38 to 42/share in the coming days or roughly 30% gains. Keep in mind these leveraged funds are not perfectly balanced to produce reciprocal gains and losses between long and short funds, but are reasonably close approximations. Also know there may be better ways to profit from seemingly non-random patterns that continue to recur at predictable intervals. Other leveraged fund opportunities include the following:
Direxion Daily S&P Biotech Bear 3X ETF (LABD)
The Direxion Daily Technology Bear 3X ETF (TECS), the inverse fund to the technology bull fund TECL shown above.
These are but a few profitable trading examples to use to exploit the FANG+ Index anomaly and the ongoing VIX Volatility anomaly described in previous articles. The combination of the two irregularities being fueled by quantitative tightening by the Fed proposed into 2019 and 2020 could mean prolonged profitable patterns. Make the most of these opportunities until they are arbitraged away by active traders.
There are other studies I am conducting on such anomalies, and until the effects are collectively arbitraged away, I see highly profitable opportunities here for investors in the coming months.
All the very best and have a great week of trading!
JD Henning, PhD, MBA, CFE, CAMS
Disclosure: I am/we are long TVIX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.