2023-07-08 05:31:23 ET
Summary
- Invesco QQQ ETF has outperformed the S&P 500 since the start of 2023, stunning bearish investors and market strategists.
- With the AI hype likely reaching a near-term peak, QQQ's momentum seems to weaken as the market refocuses on valuations.
- Dip buyers holding on to significant profits should consider lightening up their exposure on QQQ, as it potentially undergoes sector rotations into less expensive ones.
- QQQ's price action suggests it could underperform the S&P 500 moving ahead as the AI hype dissipates.
Investors in Invesco QQQ Trust ETF (QQQ) (NDX) have enjoyed an impressive recovery in their positions. The strength in QQQ has surprised me and surpassed my wildest expectations. As a growth and tech investor, I've seen strong gains in stocks that members of my service who bought along with me late last year and early this year saw significant gains. Even the battered stocks that experienced some of the worst showing in years experienced an incredible recovery.
Sector | Weightings % |
---|---|
Technology ( XLK ) | 50.82% |
Communication ( XLC ) | 16.71% |
Consumer Cyclical ( XLY ) | 15.56% |
Invesco QQQ top sector holdings. Data source: Seeking Alpha
With the top three sector holdings accounting for more than 83% of QQQ's weightings, the risk-on sentiments that particularly benefited semiconductor stocks in Q2 also saw a significant liftoff in the tech sector. Nvidia's (NVDA) massive surge has given more impetus for buyers who missed adding the picks-and-shovels AI stocks earlier to jump on board as they indulged in their FOMO instincts. While NVDA's momentum has slowed, it's still perched close to its highs formed nearly two months ago but teetering closer to a steep pullback.
The communications sector as a whole remains undervalued. However, Meta Platforms ( META ) and Google (GOOG) (GOOGL) have significantly boosted the sector and QQQ, as they rallied impressively. I also highlighted in a recent article that META has recovered its long-term uptrend bias, suggesting potential long-term upside could be in store as it attempts to retake its all-time highs.
Tesla ( TSLA ) and Amazon ( AMZN ) have also led the gains in consumer cyclical since bottoming out earlier this year. As such, it should be clear that the outperformance of QQQ relative to S&P 500 ( SPX ) ( SPY ) shouldn't be surprising, given the relative momentum gains in the QQQ sector weightings.
However, I believe it's time for investors to take stock of their portfolios. I have already lightened up on some stocks, seeing the opportunity to selectively rotate out of overvalued growth and tech exposure. I don't see a steep decline back to the abyss that bearish Wall Street strategists are keen to promulgate. I updated my members in a recent daily market analysis that these strategists are still surprisingly extremely bearish. Based on the sell-side indicator developed by Bank of America's (BAC) quant team, it has proved to be a successful contrarian indicator, fading the over-optimism and over-pessimism of Wall Street strategists. As such, BAC quant suggests that the rally in the S&P 500 could carry on through 2024.
Other indicators that I've watched that include retail investors' positioning have also not shown the speculative fervor that lifted these indicators to bubble levels that we saw in 2021. Bearish retail investors have also been burned as they went into over-pessimistic mode in late 2022/early 2023, just to see the market turn up and continue to rally further through the first half. Given the recent relative positioning seen in the retail investors' put/call ratios, they have likely learned their lesson, but through the hard way. Still, they are not close to the frothy feverish levels seen in late 2021, suggesting we could get further upside from these investors turning bullish after missing the train earlier.
However, with the more diversified S&P 500 underperforming QQQ significantly since the start of the year, I believe it's now appropriate for investors to turn much more cautious on QQQ, as tech is now overvalued as a whole.
With that in mind, let's look at the levels that investors should consider carefully, as underlying sector rotation could occur moving forward as investors cut exposure in overstretched sectors into less expensive ones.
QQQ/SPY price chart (weekly) (TradingView)
Admittedly, I didn't glean strong sell signals that would have accompanied such a strong surge, as seen in the outperformance in QQQ/SPY since early January.
QQQ survived several scares along the way but didn't look back, as investors (correctly) positioned for a no/mild recession scenario, which surprised the doomsday economists. Economist Edward Yardeni even quipped in his recent commentary on July 6 that the " consensus view is moving toward no recession coming after all."
I've been waiting for more clarity over QQQ/SPY's price action, and assessed that the risks of QQQ underperforming SPY have increased over the past few weeks.
Its momentum has stalled. In addition, it has moved closer to the critical resistance zones that previously stalled its progress in late 2021. Therefore, I don't see an attractive risk/reward upside from these levels. I postulate that investors could be rotating under the hood out of the more expensive QQQ exposure into less expensive sectors within SPY to drive the next stage of the market's recovery.
With that in mind, I gleaned that it's now appropriate for investors to consider cutting exposure in the QQQ if they have not done so.
Rating: Sell (Revised from Hold).
Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing, unless otherwise specified.
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QQQ: Prepare For A Steep Decline (Rating Downgrade)