2023-06-06 04:17:30 ET
Summary
- TQQQ is up 118% this year.
- While we're overbought, I think it's going higher still in 2023.
- Maintaining my strong buy recommendation with the caveat we are likely to see some consolidation short-term.
If anything has defined 2023 so far, it's been the otherworldly performance we've seen from mega-cap tech stocks. I've seen countless analysts and authors in recent weeks bemoaning a lack of breadth in this rally, and they're right; this has been one of the most concentrated rallies I recall seeing. However, I want to be clear that I don't care about breadth, and I don't think you should either. We can either sit on the sidelines and complain while certain stocks moon, or we can join in on the fun; that's an easy choice for me.
Back in January , I said buying ProShares UltraPro QQQ ETF ( TQQQ ) was a great way to play the bull market I thought was coming for this year. TQQQ, if you're not familiar, is a 3X leveraged long QQQ exchange-traded product; you can read about it in the linked article above. Bottom line is that it's a highly volatile, extremely concentrated way to gain exposure to mega-cap tech stocks.
Seeking Alpha
Since that article, TQQQ is up 73%, while the S&P has gained 6%. Six percent is nice, but those complaining about breadth in the rally have probably not necessarily enjoyed that sort of gain when 73% was on offer.
I updated my thesis back in March , following a sizable rally in tech stocks.
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TQQQ is up 43% since then, and I received my fair share of negative comments saying there was no breadth and tech stocks were overbought, etc. Again, I'm here to build wealth, not "be right" about whatever is going on in the market.
Now, 73% in a few months is a home run for anyone, and I'm extremely happy with how this has gone. However, the question is now, do we continue to buy/hold TQQQ? I think the answer is yes, with a caveat. Let's dig in.
Strength upon strength
Let's begin with the chart of TQQQ, which is just beautiful if you've been long. The product started the year just under $18, bottomed at $16 shortly after, and is now at $37 . This thing has been flying , and it's difficult to sit on the sidelines and complain about a lack of breadth (even if it's true) while this is going on.
This thing is so bullish it's hard to fault what's going on here. However, and this is a big 'however', the TQQQ is pretty overbought at this point, and showing signs of exhaustion. That means that while I remain very bullish for the rest of the year, we need some consolidation or light selling to put the momentum situation right. It is my belief that this will not mark the top of this rally, but rather will simply be the rest before the next move higher. I've explained my rationale for being so bullish in the two linked articles, so I won't waste the space here saying the same thing. However, I see cause for concern above, and I see cause for concern with some of the larger components the fund owns in the near-term.
If we look above, we can see a negative divergence playing with the 5-day RSI, which means the fund is making new price highs without any sort of confirmation from the RSI. We are not seeing the same thing with the longer version in the 14-day RSI, but it is extremely overbought on both measures.
The PPO is also extremely overbought and is at the same level (+7) where the ETF has topped and rolled over at times in the past. When we take the weight of the evidence here, it certainly looks like TQQQ could use a breather.
I noted two other overbought areas on the chart where TQQQ was extended ahead of its 20-day exponential moving average, with the August 2022 high at 13% over the 20-day EMA, while the February 2023 high was 17% ahead of the 20-day EMA. Today, we're 12% over the 20-day EMA, so again, it's overbought.
None of this guarantees we get selling. However, when we put all of this together, it certainly looks like it needs some selling, with the 20-day EMA being the first logical stop. A 12% decline on TQQQ is roughly a 4% decline in the QQQ; that's not exactly out of the realm of possibility right now.
I'm not telling you to run out and short tech stocks; what I'm saying is the odds are on the side of the bears for the short-term until these conditions are worked through. After that, I still think we're going a lot higher.
Component analysis
Below we have the current top 10 holdings of TQQQ, and there are some highly familiar names in there. The top five collectively make up 44% of the index, so they matter a lot. Let's take a look at these names to see what we can learn about the future direction of TQQQ to go deeper in our analysis.
Fund website
You can see above that Tesla is fifth, but Alphabet ( GOOG ) has two classes of stock that collectively make it the third largest component. Thus, for this, I've used Microsoft ( MSFT ), Apple ( AAPL ), Alphabet, Amazon ( AMZN ), and NVIDIA ( NVDA ) as the top five. We're taking a look at weekly charts to get a sense of longer-term direction; let's begin.
Microsoft has rallied enormously this year, due in no small part to its quick-thinking investment in OpenAI. Regardless, the stock has added over $100 just in 2023.
The 20-week exponential moving average is well ahead of the 50-week simple moving average, and both are sharply up-sloping. On the more cautious side, the 14-week RSI is very overbought at 75. That means upside steam is likely waning for the bulls at the moment.
In addition, the stock is running up against the 2021 highs in the area of $340. That's highly consequential resistance and I don't think it will just blow right through it. Finally, the weekly PPO is also right at the spot where it topped and rolled over in 2021.
Overall, I think Microsoft's short-term risk is sideways/lower. Longer-term, look out above, but right now it needs a breather.
Next up is Apple, which I think looks a little less bullish than Microsoft.
We can see the PPO and 14-week RSIs are both overbought, but they've also begun rolling over. Apple actually hit a new all-time high, but again, just blasting right through such consequential resistance is challenging, particularly after a 38% run in one of the world's largest companies.
I think Apple will make new all-time highs later this year by a wide margin, but I'm actually more cautious on Apple than Microsoft shorter-term.
Next up is Amazon, which looks comparatively much better.
The 20-week EMA just crossed the 50-week SMA, which often portends a much larger move in the prevailing direction. It's also much further away from being overbought than MSFT and AAPL, and for that reason, I'm extremely bullish on Amazon right now, short-term and long-term.
Fourth is Alphabet, and like Amazon, I think it's got more immediate upside than MSFT or AAPL.
We see the same characteristics in terms of moving averages, but it is far less overbought, meaning there's more room to run back towards the highs from 2021. Like Amazon, I'm bullish on GOOG short- and long-term.
Last up is NVIDIA, the poster child for the AI-driven rally.
NVDA is, shall we say, overbought. It's 14-week RSI is 86 , which is extraordinary. It's weekly PPO is at 18, and it's 38% ahead of its 20-week EMA. I could see a pullback to the breakout area of 340/350 in the cards to reset momentum. Will we get that? Only time will tell, but like Apple and Microsoft, this isn't one that I think has high odds of just continuing to go higher short-term.
What do we do now?
The bottom line on TQQQ is that the ETF itself has performed beautifully this year, and I think there's more in the tank for 2023. However, I recognize it's very overbought, and on the back of the component analysis, my cautious short-term view is reinforced.
Microsoft, Apple, and NVIDIA make up 30% of the ETF, and I think all need a breather and/or pullback. That will make moving higher for the QQQ/TQQQ/etc. very difficult if that comes to fruition. That changes nothing about my longer-term view, however, so here's how I'm rating TQQQ right now. I'm keeping my strong buy on the ETF, with the caveat that we need to see a short period of consolidation and/or light selling to get momentum back to a more balanced area. When we see that, look out above.
For further details see:
TQQQ: 2023's Bull Market In Tech Stocks Is Not Done (Technical Analysis)