Riding to Points A Through G on the Sentiment Cycle

 | Jun 15, 2017 | 6:00 AM EDT
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Let's talk about sentiment.

A few decades ago, my mentor in this business, Justin Mamis, came up with what he termed the Sentiment Cycle. You can see it below. Let's apply it to the FANG stocks because the sentiment change I have seen in these stocks in the last few days would make your head spin.

I would like to start by asking you to look at Anxiety, which I have labeled with an A. To me, that was where these stocks were last fall, before the election. I am going to use Apple (AAPL) to represent the FANG stocks since most of them have the same or similar chart.

Letter A on both charts represents the anxiety folks had just before the election. Then you might recall after the election the FANG stocks sold off while everything else went up. There was actually some decent aversion to this group based on what was termed the Trump Trade. Let's call that point B.

Then the rally in these stocks began, but you might recall folks were still very focused on the Trump Trade stocks, mostly with love for the financials. Note the stall-out in Apple in mid-December and the choppiness as folks were still in denial that these stocks were going to lead. Heck, I recall writing about a technology portfolio manager who came on television saying he owned financials! That's point C.

Then the stocks took off, but it wasn't until they were almost the only game in town that folks started to glom on to them as if they were a lifeboat in the middle of the ocean. Let's call that point D, returning confidence --which is on both the left and right sides of the chart.

At this point, I admit I am uncertain if that should be late March or mid-May on the chart of Apple -- thus the two D's with question marks, but either way, that's when we saw the confidence period. We had that mid-May swoon and the FANG stocks took off after that. Recall that was around the time the net volume began to lag tremendously, in the latter part of May. So that is most likely the "buy the dip" period on the chart (point E). However, it is possible that mid-April is really the "buy the dip" period. Nothing is perfectly aligned, as you can see, but the sentiment was assuredly to buy the dip.

Early June saw enthusiasm as that was when we had the $1,000 club with Amazon (AMZN) and Google (GOOGL) crossing into quadruple digits. We'll call that F.

Then last week happened. Are we at the Disbelief stage with a subtle warning (point G)? It seems that way, since I see more and more folks telling us they have sold their FANGs or they have no interest in buying more, and some even suggesting we short them.

If the sentiment cycle is to hold true and if we do see some more selling in this group, then the pattern should continue to play out. Remember, it need not play out exactly as shown, but thus far the pattern has held.

For more market analysis from Helene Meisler, sign up for Top Stocks, published five times a week. 



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