![\"NDX](\"\/campus\/wp-content\/uploads\/sites\/2\/2020\/06\/image-88.png\")
<\/figure>\n\n\n\nSource: Bloomberg<\/p>\n\n\n\n
You may notice that the index and its moving averages have gone parabolic. To a certain extent, that could be expected. Some of the NDX leaders are indeed growing their earnings at an exceptional rate, and that could justify rapidly increasing valuations. Yet the pace of the index\u2019s ascent is on a par with the 1998-2000 period. That period came to be known as the \u201cinternet bubble.\u201d <\/p>\n\n\n\n
To be sure, there is now much more earnings power behind the leading companies of now versus then. But individual stocks and markets as a whole have a very difficult time sustaining parabolic growth rates. NDX did not fully recoup its 1999 era prices until well over a decade has passed. The problem is that when parabolic price gains can no longer be sustained, the result can be very painful. When markets rise at a linear rate, a reversion to the mean can be relatively modest. When markets rise at a parabolic rate, a reversion to the mean can be quite substantial. The magenta line is the 4 quarter moving average, effectively 1 year. We can see NDX riding that index for most of its existence. But that moving average is now 18% below the current level. A basic mean reversion would have us flirting with a bear market! The yellow line is the 12 quarter moving average. Throughout the current decade that has provided substantial support. Do we really want to see NDX test a support level that is 34% lower?<\/p>\n\n\n\n
Let\u2019s be straightforward about a few things. Although markets with parabolic moves and increasingly narrow leadership tend to end poorly, that result is not preordained. First, there is nothing that says that NDX can\u2019t keep up its current rate of growth. Second, there is nothing that requires a stock or a market to revert to a mean. Even if it does revert, the index can do so by moving sideways or up gently long enough for the moving averages to catch up. Third, we are talking about huge amounts of money here \u2013 literally trillions of dollars in market capitalization. <\/p>\n\n\n\n
There are many reasons for investors to consider holding the FAANG stocks and their brethren. But history shows that safety is not likely to be one of them.<\/p>\n","protected":false},"excerpt":{"rendered":"
After reviewing FAANG performance, one might expect to see a steady chart pattern. A long-term chart belies that assumption.<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[14700,6,8,9,22,26,3],"tags":[155,149,411,566,567,558,590],"contributors-categories":[13576],"class_list":{"0":"post-49652","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-ibkr-market-insights","7":"category-north-america","8":"category-region","9":"category-securities","10":"category-stocks","11":"category-text-articles","12":"category-traders-insight","13":"tag-aapl","14":"tag-amzn","15":"tag-fb","16":"tag-goog","17":"tag-googl","18":"tag-ndx","19":"tag-nflx","20":"contributors-categories-interactive-brokers"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"\n