Technical Indicators to monitor US stocks that investors may not know

First of all, let me ask you a question. Which of the following ETFs do you think is the highest gainer this year so far?

In this article today, we will answer this question in detail:

According to Bank of America statistics, since January, the seven major technology stocks, including Apple, Microsoft, Alphabet, Amazon, NVIDIA, Meta and Tesla, have risen a median of 43%, almost five times that of the S&P 500; the average gain is 70%, while the other 493 stocks in the S&P 500 have risen an average of only 0.1%.

Recently, U.S. bond interest rates continue to rise, 10-year U.S. bonds have exceeded 3.7%, high inflation, interest rate hikes, recession, debt ceiling and banking problems also from time to time to cause concern, the technology leader stocks this strong trend seems to be "puzzling".

In fact, the logic behind it is that, on the one hand, the future recessionary pressure in the United States more reflected in service-based consumption, and technology companies may be most of the earnings revision completed last year, and the head of the company to reduce costs and efficiency after the reduction of staff compared to small companies have a stronger risk tolerance; on the other hand, the technology leader companies this year, led by the trend of AI innovation, such as AI chip leader NVIDIA has risen 191% this year, investors Investors are optimistic about its future performance growth.

The Duquesne family office of billionaire founder Druckenmiller (Stan Druckenmiller) recently said: "If NVIDIA is as big as I think it is, we will hold it for at least 2 to 3 years, or even longer, rather than 10 months. Druckenmiller also reiterated his view from last month that INVISTA might not even slip in a potential recession.

The Financial Times has described the 2010s as the "Decade of the FANGs," so will these tech giants continue to reign supreme? No disruptive forces are in sight, at least not yet, and the giants themselves are evolving.

Let's take a look at the frequently asked questions and answer them one by one ~

Like all leveraged ETFs, FNGU is triple leveraged by holding the underlying stock and derivative contracts, which is far less expensive than financing. This is one reason why FNGU's management fee is only 0.95%, far less than the interest rate on financing.

Also, because of this, FNGU does not run the risk of closing out positions that require additional margin or have a market value that is lower than the margin.

This happens mainly because FNGU seeks to triple the daily return of the FANG+ Index, not the total return.

This also leads to an investment characteristic: a small consecutive increase in the benchmark index can bring more returns to FNGU than a large single day increase!

Below scenarios are for illustrative purposes and does not constitutes any investment recommendation or advice.

Scenario A: FANG+ index rises 3% for 3 consecutive days, the total 3-day return is 3% ^ 3 = 9.27%, while the total return of FNGU is (3*3%)^ 3 = 29.50%

Scenario B: The FANG+ Index rises 9.27% in one day, while the total return of FNGU is only 9.27% * 3 = 27.81%

To summarize:

In a one-sided up market, FNGU's return would be much higher than three times that of the benchmark index;

In a one-sided down market, FNGU's loss will be less than three times that of the benchmark index;

In an oscillating market, FNGU's loss will increase as the oscillation continues.

When investing in leveraged ETFs like FNGU, there may potentially be an issue of oscillator losses!

Below is for illsutrative purposes and not an investment recommendation nor advice.

Suppose the FANG+ index falls 10% today in an oscillating market, then FNGU will fall 30%.

If the FANG+ index wants to rise back to its original price the next day, it only needs to rise 11.1%, while FNGU will follow the trend of that day, which is 33.3%. But for FNGU to go backto its original price, it needs to go up 42.9%! Therefore, when the FANG+ index rises back to its original price, FNGU is still in a loss position, which is called oscillatory loss.

In addition, FNGU has a management fee loss of 0.95%, which is higher than the average leveraged ETF of 0.91% and higher than the average ETF group of 0.585%.

The chart below shows the estimated FNGU returns for some combinations of FANG+ index volatility and index performance over a one-year period.

The shaded areas represent situations where the fund is expected to outperform the index by a factor of three, while the red numbers highlight situations where the fund is expected to show a negative performance.

1. when index volatility is below 20%, FNGU mostly outperforms the index by a factor of three, regardless of index gain or loss, demonstrating the advantages of FNGU as a leveraged ETF;

2. However, as the annualized volatility increases, the risk of leveraged ETFs increases dramatically. For example, when the one-year return of the index is 20%, White may incorrectly expect the fund to have a 60% one-year return. However, as shown in the table, when the annualized volatility of the index is 50%, the expected return of the fund is -18.38%.

3, There is a very fatal risk: if the index fell 33% during the year, due to 3 times the leverage then FNGU may return to 0. Even if the index subsequently rose, this loss is permanent. Although this is very unlikely, historically the NASDAQ index fell 38% in 2000 when the Internet bubble burst, and the FANG+ index fell 28% last year during the U.S. rate hike cycle, so investors who bought the correspondingly leveraged ETFs in those two years would have lost a lot.

Statistically, the annualized volatility of the FANG+ Index since its launch on September 23, 2014, as of June 14, 2023, is 28.7% but the volatility in 2022 is as high as 43.1%, which, combined with the index crash that year, also resulted in the largest annual loss of 88.47% since FNGU's launch.

So, compared to an average daily index volatility of 2%, the volatility you have to endure to hold FNGU for a year is significantly higher.

*Focuses on growth-oriented U.S. leaders and technology giants for greater risk tolerance even in recessionary cycles;

*Average weighting of constituent stocks to better reflect the growth value of each constituent stock;

*Triple-leveraged investment, which provides better returns when companies are on an upward trend;

*The investment is concentrated in the technology industry, which is more influenced by the Fed's interest rate hike and needs to be cautious of the U.S. inflation or the Fed's future interest rate hike;

*The volatility of the underlying investments is high and the risks are high, especially when the index enters a downtrend, which may bring permanent losses.

The above is the introduction, performance and advantages and disadvantages of FNGU, which you can refer to and evaluate whether you are suitable for investment.