Wall Street's FANG love could come back to bite it

Wall Street's major stock indexes notched new record highs on Thursday, thanks to the recent strength of key big-tech stocks. It has been all about the "FANGs" lately, as Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google parent Alphabet (GOOG) have pushed relentlessly higher. And that's leading many to wonder if a new tech bubble is in play.

But another hallmark of the market's performance lately has been curiously narrow breadth. That is, only a small group of stocks has been enjoying the bulk of investors' attention and buying demand. Consider that only around 69 percent of S&P 500 components are in uptrends vs. 80 percent back in March. Or that just 60 percent of New York Stock Exchange shares are above their 50-day moving average, a key measure of uptrend strength.

While this has traditionally been a sign of narrow, and thus less resilient buying power, it hasn't mattered to this market rally yet. Nor are professional investment managers concerned. They're simply playing favorites and going along for the ride. But will it last?

According to Bank of America Merrill Lynch, tech stocks enjoyed a 12.6 percent rise in the first quarter (more than double the broad market's gain). That pushed active fund managers to extend their record overweight position in techs to a level seen just 3 percent of the time since 2008.

FANGs have done even better for the year through May 30, up 30 percent vs. an 8 percent rise for the S&P 500. A whopping 71 percent of fund managers surveyed by Bank of America are overweight the FANG stocks relative to the rest of the market.  

On the flip side, many underperforming techs have been severely shunned. IBM (IBM), Xerox (XRX) and Yahoo (YHOO) are underweight on a scale not seen since the data started in 2008. Other names out in the cold include smartphone glass maker Corning (GLW), Motorola Solutions (MSI) and chipmaker AMD (AMD).

What's ironic is that AMD has actually been a strong performer, up more than 140 percent over the past year (though it's down 30 percent from late February).

Along with underperforming tech stocks, active managers are ignoring "value" stocks, those that are perceived to be good buys because their prices are unjustifiably low. And those managers are being rewarded: Bank of America points out that the percent of actively managed funds beating their benchmark this year is at its highest since February 2015.

But the trade is working because everyone else is doing it. Once the stampede for the exits starts, the performance edge will quickly reverse. 

And that could be happening now: Investors pulled more than $716 million out of the Technology Select SPDR (XLK) last week, the largest outflow in over a year. Unless this money gets reallocated to recently neglected areas of the market -- such as retail and energy -- the broad market could soon suffer a swoon.  

  • Anthony Mirhaydari

    Anthony Mirhaydari is founder of the Edge , an investment advisory newsletter, and Edge Pro, options newsletter. Previously, he was a markets columnist for MSN Money; a senior research analyst with Markman Capital Insight, a money management firm; and an analyst with Moss Adams focusing on the financial services industry.