Megacap FAANGs Stage Rebound That Fails to Erase October's Slump

(Bloomberg) -- Major internet stocks soared on Wednesday, in a rally that sets the stage for the group to end a bruising month on a positive note after results from Facebook Inc. helped to calm fears about the high-flying sector's growth prospects.

The rally was the latest example of heavy day-to-day volatility for the FAANG stocks, a quintet that also includes Amazon.com Inc., Netflix Inc. and Google's parent Alphabet Inc. All gained at least 3 percent, while Netflix surged 6.3 percent. Facebook added 3.8 percent in the wake of its results.

October was a month of superlatives for the group, with both positive and negative milestones. At its peak, Wednesday's rally had Netflix and Facebook tracking to close with their biggest one-day gain since April. That said, Netflix still remains on track for its steepest monthly decline since January 2016, while others in the unofficial group have seen even more dramatic drops. October is poised to be Alphabet's worst month in six years and Amazon's weakest in almost a decade.

“This is a sector where people chase performance, and that cuts both ways. Anytime these stocks underperform people get panicky, but they've also been such big winners that at the slightest sign of strength people are willing to jump back in,” said Steve Sosnick, chief options strategist at Interactive Brokers LLC.

“The volatility isn't surprising, but you should view rallies like today's with suspicion. Certainly I'm a bit skeptical when I see Amazon up $50 on relatively minor news,” he added.

October represents the second straight monthly decline for the tech sector, which has fallen out of favor as a variety of issues, including higher interest rates and the prospect of a trade war between the U.S. and China are seen as creating a more-challenging environment, pushing investors away from the high-growth names that have long led the market higher.

Earnings have compounded concerns over the group's growth prospects. Both Amazon and Alphabet reported revenue that grew less than expected, underlining fears that valuations may have outpaced their fundamentals, while weak outlooks from chipmakers like Texas Instruments Inc. and Advanced Micro Devices Inc. amplified concerns about tech spending. Earnings season broadly has failed to inspire investor confidence, despite what many have characterized as strong results across sectors.

“The only thing you can say is that volatility will continue. All year people were acting like these stocks could do no wrong, but then in October the story was that they could do no right. The truth, obviously, is somewhere in-between,” said Jeff Mills, co-chief investment strategist at PNC Financial Services.

“That Facebook is rising today doesn't mean the growth fears are gone, but whether today's trading represents a blip or a rotation back into high-growth names remains to be seen.”

The social-networking giant has in many ways been at the center of the FAANG story for the past few months. In its second quarter, it disappointed with its revenue and user growth, sparking the biggest one-day loss of value for a U.S. stock in history. It has yet to recover from that slump, and remains the only FAANG member in the red for the year, down about 15 percent.

Upcoming catalysts for the group could include Apple Inc.'s earnings on Thursday and the upcoming midterm elections. The FAANGs are widely seen in the crosshairs of government regulation regardless of which political party emerges with majorities in the U.S. House or Senate. Alphabet and Facebook, two companies that derive much of their business model from user data, are particularly in focus.

To contact the reporter on this story: Ryan Vlastelica in New York at rvlastelica1@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Brad Olesen, Joanna Ossinger

©2018 Bloomberg L.P.