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Trade of the Week: Social Media index set for fresh record highs?

28 July 2021

The Social Media index has been on a tear, with prices now flirting with the 800 mark for the first time in its history! However, from a technical perspective, this index has ventured well into overbought territory, having broken past its upper Bollinger band while its 14-day relative strength index has breached the 70 mark. These technical indicators suggest that a pullback appears imminent.

What is the Social Media index?

The Social Media index tracks the overall performance of social media companies via these 4 stocks, all in equal-weights (and here’s how each has performed so far in 2021):

The figures above have contributed to a stellar year-to-date performance for the Social Media index, having climbed by 51.2% so far this year, which far outpaces the gains for benchmark US stock indices for the same period:

Why have social media stocks been climbing higher?

In short, it boils down largely to better-than-expected earnings. Last week, we witnessed how Twitter and Snapchat exceeded market forecasts for their respective Q2 earnings. Those glittering results also helped lift the stocks of other social media platforms, which in turn helped the Social Media index hit fresh record highs.

Can the Social Media index continue climbing?

Yes, but a pullback is due to happen sometime soon, given the technical factors mentioned earlier. Such a pullback in broader US markets could be seen as healthy, especially following the recent runup that has set new record highs for the likes of the Dow, S&P 500, and the Nasdaq. This pullback should clear some of the froth from the markets, which should allow US stocks to find a more sustainable footing before pursuing fresh peaks. The same is expected to apply for the Social Media index as well.

What could push the Social Media index even higher?

Facebook and Alphabet (Google’s parent company) have to report Q2 earnings that exceed forecasts

Alphabet’s earnings are slated for later today, after US markets close on Tuesday 27 July. Facebook is due to do the same after US markets close on Wednesday, 28 July. Markets are already forecasting a 45% year-on-year increase in Alphabet’s Q2 revenue, and a 49% spike in Facebook’s top line compared to the same quarter in 2020. Considering the heightened expectations for both of these companies to announce better-than-expected financial Q2 results, both stocks have already been rallying hard in recent sessions.

Social media platforms are set to report a stellar Q2 thanks to a reopening US economy. As more consumers are freed from lockdown measures, businesses would have been eager to reach more customers. That has translated into more spending on online advertisements, which feeds into the revenues and profits for Google’s and Facebook’s platforms (as it did for Twitter and Snap).

Given the elevated optimism that’s already baked into these two tech stocks, both Facebook and Alphabet would need an outsized positive surprise in their respective earnings releases this week in order to push their stock prices significantly higher this week. Even so, according to Bloomberg data, markets are still pricing in a 4.6% single-day move for Alphabet’s stocks on Wednesday, the day after its earnings. Likewise, a 6.27% single-day move is forecasted for Facebook on Thursday, the day after its earnings. Such a move to the upside would spell new record highs for the Social Media index.

Overall market sentiment must stay in risk-on mode

Besides stellar earnings, the overall market sentiment would have to be conducive for social media stocks to realize more of their upside. Recall how US stocks swooned in the middle of July, reportedly due to rising concerns over the delta variant of the coronavirus delaying the global economy’s full recovery. However, such has been the resilience of US equities, and the buy-the-dip impulses so strong, that they’ve since attained their highest-ever closing prices.

Market participants have to be given enough reason to pay less attention to their fears or negative risks, and instead focus more on the brightening outlook to keep ploughing their funds into riskier assets such as stocks.

In summary, while technical indicators point to a pullback happening soon, better-than-expected Q2 earnings out of Facebook and Alphabet this week should give investors enough cause to push the Social Media index sustainably above the 800 mark, provided that broader risk-appetite remains intact.



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