After getting some much needed relief Wednesday, Internet stocks and exchange traded funds are trading lower Thursday, underscoring the critical technical scenarios faced by funds such as the First Trust Dow Jones Internet Index Fund (NYSEArca: FDN).
Factoring today’s loss of about 3%, FDN is lower by 12.4% since Feb. 28. The PowerShares NASDAQ Internet Portfolio (NasdaqGM: PNQI), down 2.8% Thursday, is also lower by more than 12% since the end of February. Social media stocks have been worse than large-cap Internet names as the Global X Social Media Index ETF (NasdaqGM: SOCL) is now down 17% since Feb. 28. [Social Media ETF Nears Bear Market]
Now, FDN and PNQI are flirting with their 200-day moving averages on their daily and weekly charts. That area could serve as a point where the ETFs bounce off support, rewarding astute traders in the process.
“Mean-reversion traders view the market as one big rubber band. When it becomes too extended in either direction it’s likely to snap back, or revert back to its previous trend. I think the Internet index is showing a great example of a potential mean-reversion,” writes technical analyst Andrew Thrasher on Trader Planet.
Amazon (NasdaqGS: AMZN, Facebook (NasdaqGS: FB), eBay (NasdaqGS: EBAY) and Priceline (NasdaqGS: PCLN) combine for roughly a quarter of FDN’s weight. That was good news a last year and for a little while this year. But over the past month, the best performer of that group is eBay and the stock is still more than 6%. [Internet ETFs Teach Old Lessons]
While it is vital to assess the technical of the aforementioned stocks and ETFs before hitting the buy button, it is also worth noting fundamentals, namely excessive valuations have once again been the undoing of Internet stocks.
“As for Internet stocks, we are back to a world reminiscent of the late 1990s, where only the most creative metrics can justify the premiums being paid for certain companies,” says BlackRock Global Chief Investment Strategist Russ Koesterich.
However, when the selling abates, risk/reward could favor those with the fortitude to be long ETFs like FDN and PNQI.
“We’ve seen a fair amount of selling in the names that make up FDN and its possible traders aren’t done shedding shares. But it appears that with the current set of price data, the risk/reward favors a short-term bounce as price holds its long-term moving average before sellers will get the opportunity to take back control. We’ll see where price takes us,” said Thrasher.
Chart Courtesy: Andrew Thrasher, CMT
Tom Lydon’s clients own shares of Amazon and Facebook.