Apple and the FANG stocks could lose at least a third of value, market watcher warns

Wall Street's crown jewels, the FAANG stocks, have lost their shine lately.

Facebook, Apple, Amazon, Netflix and Google parent Alphabet are selling off again Monday after losing a combined $185 billion over the previous two sessions.

Ahead of Apple earnings scheduled for Tuesday evening, Larry McDonald, editor of the Bear Traps Report, warns to stay away from what has been one of the hottest areas of the market this year.

"These are stocks you want to run away from," McDonald told CNBC's "Trading Nation" on Friday. "I see potentially 30 percent to 40 percent downside on the FAANGs."

A 30 percent decline would turn Apple and Alphabet lower for the year. Facebook is already negative for 2018 and currently trading in a bear market having fallen more than 20 percent from its 52-week high.

Netflix is close to a bear market, but would still be positive for the year if it fell 30 percent from current levels. Amazon would also remain higher for 2018, but would be pulled into a bear market.

McDonald sees a brewing crisis in passive investing, a method where capital is placed in market-weighted indexes over individual stock picks. The FAANG names make up a large portion of a number of popular indexes.

"About $6 trillion has come into passive management in recent, say, last five to 10 years, and all of that money has to go into the FAANG stocks," said McDonald.

Apple is the largest holding in the SPY S&P 500 ETF with a 4 percent weighting. Alphabet and Facebook make up a combined 5 percent, while Amazon makes up 3 percent. Apple, Amazon, Alphabet, Facebook and Netflix made up nearly 40 percent of the QQQ Trust.

McDonald's call on Apple is a contrarian one. Bill Baruch, president of Blue Line Futures, is bullish on the iPhone maker, alongside the majority of Wall Street analysts.

"Apple will be a buy at about $189 to $190.25. That's where I think you've got to step in and look to be buying that," Baruch said Friday on "Trading Nation." "I think we'll find Apple higher than this by the end of the year."

Sell-offs in Apple over the last two days have put the shares within Baruch's range. By midday Monday, it was trading at $189.90 a share.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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