QQQ: Still Time To Buy Big Tech
0The selling that took place in recent weeks was pretty rough for a lot of portfolios, your humble scribe included. Those of us that choose growth stocks over value or income took on a big serving of humble pie with the newest COVID variant coinciding with the latest round of inflationary scares. However, it appears to me that the unpleasantness has been resolved for the time being, and I remain quite bullish not only into year-end, but beyond. Since I tend to favor growth stocks, the index I like to follow most is the Nasdaq 100 (NASDAQ: QQQ ) . The QQQ has vastly outperformed the SP 500 in the past decade, as well as the most recent five years, and indeed most recent three years. Source: Seeking Alpha That’s not some sort of fluke that can be dismissed; these stocks have been the place to be over the long-term, and all indications suggest that’s probably still the case now. Given all of this, permit me to explain why I think the QQQ has bottomed, and why I think you should consider owning the index, and/or some of its individual components, depending upon your specific investing style. The pause that refreshes Pullbacks are never fun to endure because, particularly with growth stocks, even short pullbacks can cause significant pain to a portfolio. During periods of selling, stocks with the highest valuations – which tend to be growth stocks – are the ones that are sold first and sold hardest. We’ve certainly seen that in recent weeks, but keep in mind that as long as the fundamental picture didn’t change, those stocks tend to rebound the hardest as well. I don’t see yet another COVID variant – and particularly one that by all indications, doesn’t appear to be more dangerous than the others we’ve had – as a reason to suddenly abandon growth stocks. Given that, the QQQ’s discount, in my view, was and still is a chance to pick up great stocks (or a great index) at a lower price. If we look at the chart, we can see a lot to be bullish about. The new all-time high was made about $26 above the prior all-time high that was set in the beginning of September, a price level that then became critical support during the December bout of selling. I’ve circled on the chart where the bears tried for two consecutive days to get the QQQ to close below that support level, but the bulls stood strong, and we’ve been rallying ever since. These are the clues to look for when assessing whether to buy or not, and QQQ has given all indications that it is in the firm grip of a new rally, not some sort of dead cat bounce. Adding to my bullishness, the accumulation/distribution line has never wavered, and continues to move higher with higher prices. That’s extremely bullish as it means that not only is price rallying, but investors are, on average, bidding the stock up towards the end of the day rather than selling into strength. That generally begets more strength, and more higher prices. The momentum indicators – the PPO and RSI – are both showing good, bullish resets close to their respective centerlines, which is what you want to see when a leading security is pulling back. We didn’t reach bearish territory on either despite the heavy selling, and the bulls should be ready for another push higher now. We can see in the bottom panel that the QQQ continues to beat the SP 500 in terms of relative performance, which is what we want to see. If you’re trying to beat the SP 500, you need instruments that are outperforming, and QQQ is certainly one of those. The final point I’ll make on the chart is that when the QQQ is rising along with the Nasdaq’s version of the volatility index, VXN, it’s been a clear warning in the past. You can run this analysis with the standard VIX as well, but the VXN is more relevant to the QQQ since it’s Nasdaq-specific. We can see that when the correlation of the volatility index and the QQQ is positive, it is time to be very cautious. This has happened three times in the past year, and twice it resulted in very sharp, very quick selling. The third time, which was in July, resulted in a very sharp but shallow pullback that quickly resolved higher. The point is to put this tool in your back pocket and keep an eye on this relationship, because it can be a great indicator of impending selling. Now, let’s take a look at some of the components of the QQQ to see what’s what. Holding concentration is high, but with the best names One criticism of perma-bears is that they continue to say the market is being propped up by a few names and therefore, the rally isn’t “real”. That’s absolute nonsense, because first of all, higher prices are higher prices; doesn’t matter how they’re achieved. But secondly, the market is always held up by the biggest names; that’s how market cap-weighted indices work. I just don’t buy that argument, and I’ll note that anyone that did buy that argument has missed out on arguably the greatest rally in the history of the stock market.