Pro: FAANG Stocks Could Have 30-40% Downside Potential

Facebook, Inc. FB, Amazon.com, Inc. AMZN, Apple Inc. AAPL, Netflix, Inc. NFLX, and Alphabet Inc GOOG GOOGL — collectively, the "FAANG" group — has seen $185 billion in value wiped out in recent days, according to CNBC. In the view of one notable bear, more downside lies ahead. 

The Pro

Larry McDonald, editor of the Bear Traps Report, talked FAANG stocks during a recent CNBC "Trading Nation" segment.

The Thesis

Investors need to be reminded of what famed investor Peter Lynch advised investors of 25 years ago: stay away from the hottest stock in the hottest sector, McDonald said. Today, the hottest stock in the hottest sector is Apple, and there are plenty of reasons to avoid the iPhone maker aside from an investing legend's advice, he said.

Apple faces "unimaginable" supply chain risk over the next few weeks amid trade disputes and new tariffs, McDonald said. 

The iPhone maker, along with its fellow tech giant peers, faces a new problem from the surge in passive investing demand over the past 10 years, the Bear Traps Report editor said. Around $6 trillion in new money has come into passive management, and by default much of that money must go into the FAANG stocks — and has created a "brewing crisis in passive investing," he said. 

Apple is the largest holding within the SPDR S&P 500 ETF Trust SPY ETF, with a 4-percent weighting. Shares of Alphabet and Facebook combine for 5 percent and Amazon accounts for 3 percent. The five names account for nearly 40 percent of the entire PowerShares QQQ Trust QQQ ETF.

"These are stocks you want to run away from," McDonald said. "I see potentially 30-percent to 40-percent downside on the FAANGs."

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