Monday's sell-off highlights growing danger facing the U.S. stock market in coming weeks, with final 2019 returns dependent on a partial trade deal and rollback in tariffs against Chinese goods. Recent reports on negotiations have been unsettling at best, with each new comment from the White House contradicting a prior statement. Fortunately, the tariff implementation date is approaching quickly, allowing market players to finally trade on reality rather than fake news.
FAANG stocks are particularly vulnerable to this process, representing a huge chunk of investment capital that will turn south if trade tensions drag on into 2020. These issues may also face intense headwinds during the run-up into the presidential election because Democratic challengers are proposing government policies that are highly unfavorable to the stock market and Main Street retirement funds.
As a result, investors should consider taking FAANG profits in coming weeks, even if trade war participants agree on a few secondary issues like the amount of soybeans that China is willing to purchase in coming years. The market's impressive fourth quarter performance assumes that tariffs will be rolled back, ending their drag on the U.S. economy heading into a key year for politicians. Look out below if that doesn't happen as anticipated.
Dow component Apple Inc. (AAPL) is highly vulnerable to the trade war because it depends on Chinese sales to build profits and margins. The stock gapped down from an all-time high near $269 on Monday, closing below the 20-day simple moving average (SMA) for the first time since Aug. 27. This downturn matched a bearish crossover in weekly relative strength, indicating that the stock will enter a period of weakness that could last 10 weeks or more.
The on-balance volume (OBV) accumulation-distribution indicator is also waving a red flag, topping out and entering a profit-taking phase on Nov. 18 after failing to mount the April 2019 peak. It has also reversed at the 1.272 extension of the 2018 decline, which is a common turning point after a major breakout. Both technical elements expect lower prices, with the 50-day exponential moving average (EMA) at $245 marking the first downside target.
Amazon.com, Inc. (AMZN) faces major exposure to China, with tariffs affecting profits and margins. It's also vulnerable to an economic downturn in which consumers are likely to spend less money on non-essential goods. Price action has taken note of these headwinds since August, dropping into the closely aligned 50-day and 200-day EMAs. A well-defined trading floor around $1,680 will likely affect the 2020 trend if bears take control, with a breakdown exposing a decline toward $1,400.
OBV reveals high levels of apathy since a bounce ended at a lower high in April 2019, grinding sideways to lower for the past eight months. This action is especially bearish, considering we've now entered the holiday season, which books the retail sector's most important sales of the year. In addition, the failure to reach or mount September 2018's all-time high near $2,050 marks a major bearish divergence, given broad benchmark performance, raising the odds for a longer-term topping pattern that ends the multi-year bull market.
Facebook, Inc.'s (FB) 2019 performance looks bullish on the surface, with an impressive 52% year-to-date return, but long-term price structure is bearish because the stock has failed to reach or mount July 2018's all-time high at $219. In addition, the recovery rally has failed to fill the gap of 40-plus points posted on July 26, 2018, after missed earnings were blamed on privacy scandals that have damaged the company brand.
The 2019 uptick reversed in July after crossing the .786 Fibonacci sell-off retracement level, which marks a high-odds turning point in tops and trading ranges. It has just failed a second attempt to mount this barrier, reinforcing resistance that could signal the end of the rebound. OBV adds to this cautionary tale, with buying interest stalling at a lower high in April while two breakout attempts have failed. Both technical elements raise the odds for lower prices in 2020.
The Bottom Line
FAANG stocks have posted strong fourth quarter returns, but the rally may be coming to an end, telling investors to consider taking profits and hitting the sidelines.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.