Dancing Plagues Help Explain the Rise of the FAANGs

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One day in July 1518, a woman started dancing in the streets of Strasbourg, France.

Within a week, dozens of residents had joined her.

Within a month, hundreds were dancing 24 hours a day. Many danced themselves to death.

This wasn’t Europe’s first dancing plague. Many incidents like this were recorded between 1021 and 1650.

Looking back, experts attribute it to mass hysteria, toxic mold on rye, religious fervor or other causes.

In 2020, it seems unimaginable that anyone would dance themselves to death. Yet, we are still subject to bouts of mass hysteria in the modern age.

Dancing to the Tune of the Tech Craze

In Strasbourg, “the hysteria kicked off when a woman known as Frau Troffea stepped into the street and began to silently twist, twirl and shake. She kept up her solo dance-a-thon for nearly a week, and before long, some three-dozen other Strasbourgeois had joined in. By August, the dancing epidemic had claimed as many as 400 victims.”

This behavior appears cult-like.

Today, Tesla CEO Elon Musk has been known to silently twist, twirl and shake. But Musk’s cult is filled with believers in electric cars.

At Twitter, Jack Dorsey runs a similarly fervent following of tech. Facebook’s Mark Zuckerberg also has devotees following his vision.

Today’s stock market differs from a dancing plague, but not by much. Fundamentals tell us that tech stocks are irrationally priced.

Investors Ignore the Danger of FAANG Stocks

The price-to-sales (P/S) ratio is the market’s perceived value of a stock compared to the company’s revenue. It’s calculated by dividing the stock price by sales per share.

Tesla’s P/S ratio is 14. Facebook has a P/S ratio of 9.6. As a group, the FAANG’s (Facebook, Amazon, Apple, Netflix and Google) ratio is 7.

For comparison, the P/S ratio for the S&P 500 Index is 2.3.

This fundamental analysis indicator gives us an idea of how largely overvalued the FAANGs and other tech stocks are.

Technicals also confirm that these stocks are risky. The chart below shows the NYSE FANG+ Index, which tracks the performance of tech stocks.

NYSE FANG Index 2020

The blue line is the 200-day moving average (MA) of the index. At the bottom of the chart is an indicator showing how far price is from the 200-day MA.

The dashed line at the bottom shows where the index is more than 25% above its MA. When this indicator fell below the dashed line in February, a crash followed within weeks.

Once again, the indicator is pointing to a possible crash.

The Music Eventually Stops

Despite the warning signs, investors are buying FAANG stocks and ignoring the caution signs. In this way, tech investors are behaving like victims of the dancing plagues.

Traders have seen dancing plagues before. And they have seen CEOs like Bill Gates twisting, twirling and shaking for 25 years.

Just like in the Middle Ages, the music eventually stops and the dancing ends.

Future generations will look back at the tech bubbles and wonder why investors acted so irrationally — just as we wonder how anyone would dance themselves to death.

Regards,

Michael Carr, CMT, CFTe

Editor, One Trade

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