Faang Stocks Blindside Traders With $870 Billion Out-of-Nowhere Surge

(Bloomberg) -- Retail traders sold the ETF dip, hedge funds bailed at the fastest rate in five months, and institutions cut allocations to lows unseen since the financial crisis. Then the tech megacaps staged an $870 billion comeback.

It's something few investors saw coming, after a hawkish Federal Reserve sparked a violent new-year rotation out of growth companies like software and into cheap, economically sensitive shares.

Yet as Google's parent Alphabet Inc. joins Microsoft Corp. and Apple Inc. in reporting robust results, both day traders and Wall Street pros risk getting blindsided by the rebound in the famous tech cohort known as Faang.

“Growth and tech have seen a major reversal off the lows,” said Chris Harvey, head of equity strategy at Wells Fargo Securities. “The quick turnaround is likely causing pain not only for investors that have shunned Tech but also some near-term pain for short sellers.”

It's a lesson for anyone betting that the heydays are likely over for the Faang grouping, which also includes Amazon.com Inc. and Facebook parent Meta Platforms Inc. While the pandemic-era safety trade in large-cap equities is on the wane, this earnings season is showing yet again the dangers for anyone shunning these reliable profit generators.

Almost $1 trillion has been added to the total value of Faang stocks as the group surged 10% over past six days, buttressed by better-than-expected earnings. Facebook announces results after market close Wednesday, while Amazon.com reports Thursday.

Read: Tech Gets Crushed Again on Traders' Jitters Over So-So Earnings

The Faang bloc is still down 4% this year, in line with the broad S&P 500. But a lasting rebound would be bad news for those who have avoided tech stocks.

In Bank of America Corp.'s January survey of global fund managers, net allocation to the sector fell to the lowest level since 2008. Hedge funds raised bearish bets and sold long positions, cutting tech's relative holdings to the lowest level on record in Goldman Sachs Group Inc.'s prime-broker data.

While retail investors bought the dip in the broad market, Invesco QQQ Trust (ticker QQQ), the largest exchange-traded fund tracking the tech-heavy Nasdaq 100, suffered outflows of $6 billion in January, the largest monthly withdrawal in two decades. Meanwhile, short wagers against QQQ climbed above 5% for the first time since the 2020 pandemic bear market, data compiled by IHS Markit show.

For the first few weeks of 2022, such skepticism paid off. What started as an aggressive selloff in speculative corners spread to the rest of the market, and the Nasdaq 100 tumbled 15% from its November peak.

Then the tide started to shift once tech giants reported results. Last week, Microsoft's forecast on its Azure cloud-computing business soothed investor concern about a slowdown and Apple demonstrated the company's ability to navigate a difficult supply environment. Google on Wednesday added to the latest evidence of Faang resilience, posting a surge in advertising revenue.

The Nasdaq 100 has climbed four days in a row. Along the way, the benchmark gauge approached its 200-day average, a key long-term trendline widely watched by investors.

“Ultimately these are companies that do have access to some of these long-term secular growth stories,” Meera Pandit, global market strategist at J.P. Morgan Asset Management, said in a Bloomberg TV interview with Jonathan Ferro. “As growth slows in the second half of the year, investors are going to need growth in their portfolios, and these are some of the interesting core holdings.”