Some days the markets just hate to go down. They rebel against it with all their heart and with all of their soul and all of their might.
Tuesday was one of those days. How can we spot them? Because of the stock of Netflix (NFLX) , that's how. When you get a company that releases earnings and then describes them as "strong but not stellar" you know investors are in for a bruising.
But after dropping more than 55 points, the stock furiously rallied to down no more than 19 points, a sure sign that this market has an easy time overlooking worries for the "N" in FANG.
Now, how was this stock able to zoom up so hard after being laid to waste after membership growth came in at 5.2 million, the same as the quarter last year but lower than the 6.2 million forecast? How can we get a bounce back of this nature even though the stock was up more than 100% this year going into the quarter?
Here's some theories.
First, despite there being tremendous competition to eyeballs and for peoples' time, Netflix still has an excellent business with fantastic growth.
Second, the company threw cold water on the idea that there's less bingeing going on. Its programs look just as loved as always.
Third, and most important, CEO Reed Hastings, deservedly gets the benefit of the doubt. Investors don't seem to be scared about how much money Netflix is spending on new programming. They trust Reed Hastings when he says that he doesn't mind all of these other paid services springing up. He's confident that Netflix has the best programming. And they don't seem to be concerned that Netflix could be charging too much.
Perhaps most important, the buyers seem to be saying, "look, given the tremendous strength in subs anyway the real issue is poor sub forecasting by the company." Yep, Hastings, despite using logic and proportion, simply extrapolated wrong, betting there would be more than a million more subs because business has been smoking hot before. They predicted really wrong, and I don't even think that they even yet know why. But it sure has been right to buy every dip and buyers couldn't resist this one. Hence why the decline stopped at a loss of only 55 points, pretty amazing given how much it has been up in 2018 and over multiple years' time.
Now that's what I call a leap of faith.
There's something else that happened Tuesday, though, something so incredible that we have to spend some time on it because I think it is distorting the entire market, particularly the NASDAQ.
It's the ETF effect and it is driving many a trader crazy.
There are about a dozen ETFs that contain the stuff that is FANG and the ETFs have more power than the individual stocks can possibly generate. That means, idiotically, that the stock of Netflix can bring down the stocks of Amazon, Netflix and Google, now Alphabet.
That's right, our endless and relentless emphasis on FANG has spawned ETFs that force these stocks to trade together. When we identified them five years ago after going off the charts with Bob Lang, something we will do again this evening, the FANG acronym stuck and the financial engineers just couldn't resist building an ETF around them.
In fact, we now have what I am going to deem the Dumas effect, or DumAS, if you are a philistine, where the FANG four are like the Three Musketeers plus D'Artagnan, and it's "One for all FANG and all for one."
Look before I just say how stupid all of this acronymic approach to investing might be, let me give you the pseudo, challenged thought process by the letters.
First whatever ails Netflix must ail Facebook and we have to question its social dominance and its ambitions to have ad-supported videos be a mainstay.
Whatever ails Netflix must ail Amazon, the dominant subscription retailer, especially on a day after the technologically brilliant Amazon is off its game with a site crash on Prime Day.
Whatever ails Netflix must ail Alphabet because both YouTube and Netflix are about watching video online.
But what goes down because of one FANG member, can go up because of another.
It seems that every one of us has heard about the Amazon Web Services crash that brought Prime Day to a grinding halt. Those worried about big expectations for the day, joined the FANG ETF sellers and Amazon's stock shed 22 points.
But then, mid-morning, Amazon told us that Prime sales "so far" are "bigger than ever." Meanwhile an outfit that measures these things, Feedvisor, said that spending jumped 89% in the first hours of the event.
Then the stock of the near $900 billion Amazon, helped move up the stock of the $164 billion Netflix, as well as all of the other FANG members as the flipside of the Dumas effect kicked in.
There was a reverberation of some note, too. Netflix is a subscription site. Do you know that the stock of every company that comes under the rubric of subscription got crushed because Netflix missed? Apple (AAPL) , which is so reliant on its service revenue, opened down a buck. Costco (COST) shed a buck. Worst of all, Spotify (SPOT) , the music analogue to Netflix, saw its stock drop six points before rallying higher.
When the stock of Netflix opened down hard Tuesday morning when I was on Squawk on the Street, I wanted so badly to say buy it. However, it's so hard to say "ignore management's own verbiage about how things were 'less than stellar'" and just jump in with both feet. I was willing to go there with Goldman Sachs (GS) where a perfectly good quarter was met with a torrent of selling despite pretty darned good results. I think there were some who just didn't want to own the stock without the man who saved the company in the dark days, through deft handling of risk, the retiring Lloyd Blankfein. That proved to be a prescient idea. I was willing to recommend people pick up some UnitedHealth (UNH) down seven because the only reason the stock was down so badly to begin with -- and at one point it had fallen ten dollars -- was because CEO David Wichmann expressed dissatisfaction with the quarter. That came out of nowhere as it was a huge upside surprise. The company has gigantic increase in free cash flow from operations, a great measure of how it's doing.
It didn't help that most stocks that open down big tend to stay down big as brokers sell it all day and then try to nail the close to show that they averaged better than where it went out. I think the FANG effect I just detailed and the huge number of shorts played a big role in how the stock couldn't be kept down once the rest of FANG lifted.
But here's the bottom line: When you do as well as CEO Reed Hastings and Netflix have done, lots get forgiven. A big subscription miss becomes not a problem with demand, but a problem with forecasting. And when you get "the one for all and all for one" it's just too hard to keep a good FANG down.
Facebook, Amazon, Alphabet, Apple, Goldman Sachs and UnitedHealth Group are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells these stocks? Learn more now.