The following is a reprint of the market commentary from the October 2018 edition of The Option Advisor, published on September 28. For more information, or to subscribe to The Option Advisor -- featuring 10 new option trades each month -- visit our online store.
The final week of the third quarter was highlighted, among other things, by a very strong showing for tech stocks. The Invesco QQQ Trust (QQQ) hadn't quite found its way to a new high during the week, as of this writing, but did rise -- at its Sept. 27 session high -- to within about 0.5% of its Aug. 30 peak at $187.52.
From here, a drilldown into some of the more recognizable tech names in relation to their own 52-week highs is both revealing and surprising. While the financial media tends to treat "tech stocks" as virtually interchangeable with the "FAANG" names that dominate sector headlines, note that the five giants that make up that acronym -- Facebook (FB), Apple (AAPL), Amazon.com (AMZN), Netflix (NFLX), and Google parent Alphabet (GOOGL) -- are, on average, 8.64% below their own respective 52-week highs, as of the close on Sept. 27.
In other words, QQQ has managed to hold near its own highs of the year even as the FAANG contingent has retreated, in a technical feat that seems to undermine the widely accepted Wall Street narrative touting this group's outsized influence in the day-to-day tech action. And in fact, at least two of these names -- FB and GOOGL -- are now trading below their 50-day moving averages (per the accompanying table, which also shows each ticker's correlation with QQQ), even as QQQ itself began the week with a strong bounce off its own 50-day trendlIne.
Under the radar, though, are a few "old school" tech names -- "grizzled" survivors of the dot-com bust of nearly two decades ago -- that are holding their own with surprising dexterity in the Snapchat-centric year of 2018, and may in fact be providing some of the behind-the-scenes framework to help offset the FAANG volatility that has rattled the elite group in recent months. Among Cisco (CSCO), Microsoft (MSFT), and Oracle (ORCL), the trio ended the Sept. 27 session only 1.87% below their respective annual highs, on average.
Between the three of them, Cisco, Microsoft, and Oracle have a combined market cap in the neighborhood of $1.29 trillion -- notably, not too far north of Apple's solo market value. But with the collective FAANG correction (which has approached roughly 10% in magnitude) driven more so by weakness in Facebook, Netflix, and Google more so than the "trillion-baggers" of Amazon and Apple, the combined forces of the "old guard" have been more than sufficient to keep QQQ's backbone rigid in the face of these FAANG headwinds.
Those of us old enough to remember will recall that the three names above -- CSCO, MSFT, and ORCL -- were deemed, along with Intel (INTC), to be the "4 Horsemen" of the tech sector roughly 20 years ago, in the period preceding the tech crash. Similar to the FAANG cohort of the current day, it was a moniker meant to denote their sector leadership. And while our thesis on Intel at the moment is bearish, per the put recommendation set forth below, we'd argue that the remaining "3 Horsemen" have resumed their former position of tech leadership. But they appear to have done so in a manner that, for now, remains largely below the radar of those in the financial media and investing community.