With apologies to John Lennon and the Plastic Ono Band for the title of the article on VXN and QQQ places.
The latest red-hot rally in stocks, notably the NASDAQ 100 names, has put the bulls on the assault once more and the bears into hibernation. Whether or not or not the momentum will proceed is definitely unsure.
Nevertheless, one factor is for certain, some inventory metrics are undoubtedly getting extra excessive, which requires warning. Defending your self from or taking part in on a possible drawback is one thing to noticeably take into account.
Somewhat than merely exiting or shorting stocks, utilizing choices methods makes extra sense within the present setting.
Listed here are three key the reason why now may very well be a superb time to purchase bearish places, both for portfolio safety or short-term speculative trading.
Implied Volatility
Most of you’re in all probability conversant in the VIX, which is typically known as the concern gauge. It’s a measure of choice costs within the S&P 500. As lots of you realize, the NASDAQ 100 has the same software for measuring implied volatility – VXN – or “Vixen”. Under is the Chicago Board Choices Change (CBOE) definition of the VXN. For our functions we’ll substitute NDX with QQQ as QQQ is rather more closely traded.
The Cboe NASDAQ-100 Volatility IndexSM (VXN) is a key measure of market expectations of near-term volatility conveyed by NASDAQ-100® Index (NDX) choice costs. It measures the 30-day volatility anticipated by the market, which is implicit within the costs of short-dated NASDAQ 100 choices. VXN is given in share factors.
The VIX has fallen sharply of late as stocks have risen over the previous month. The VIX closed simply above the 12 months’s lowest ranges on Friday because the S&P 500 rallied, albeit removed from year-to-year highs.
Nevertheless, VXN closed at a brand new yearly low on Friday, whereas the NASDAQ 100 (QQQ) closed at a brand new yearly high. Additionally, VXN closed at its lowest level since January 2022.
A fast comparability of the final time QQQ was provided at comparable costs will present how a lot VXN’s decline is cheapening the value of places. The comparability choice assemblies are proven beneath.
On August 25 final 12 months, QQQ closed at $320.58. The $315 places from Nov. 18 had 85 days to expiry and had been priced at $14.00. IV was simply over 29.
Quick ahead to Friday and QQQ closed at $320.93, simply 38 cents higher than August. The $315 places that expired on June thirtieth had 91 days to expiration, a number of days longer than the same places that expired on November 18th from again in August. The June 30 places had been priced at $11.00. IV was slightly below 24.
All in all, final August’s barely out-of-the-money $315 places traded $3.00 cheaper than the nearly comparable places trading now.
Put one other approach, August’s places again price 4.37% of QQQ’s worth, in comparison with simply 3.43% now. All as a result of IV dropped from 29.04 to 23.76. To me, shopping for places at a less expensive worth (and the most cost effective worth in an extended time) is rarely a nasty factor.
VXN can also be a dependable market timing software, similar to the VIX on this regard. Drops to comparatively low ranges in VXN nearly all the time coincide with short-term highs in QQQ, as proven within the chart beneath. Is the QQQ close to a prime$ That is what the VXN is suggesting.
Know-how
The NASDAQ 100 (QQQ) is overbought on a technical foundation. The 9-day RSI is now above 70. The Bollinger % B simply broke above the 100 level. The MACD has reached an excessive. Shares are trading at a deep premium to the 20-day shifting common. Final time these indicators, all aligned in the same approach, marked a brief time period high in QQQ.
The NASDAQ 100 (QQQ) is getting a bit of off the skis in comparison with the opposite three main indices. The Nazzy has posted a spectacular achieve of over 20% thus far in 2023. Evaluate that to the nonetheless very respectable almost 7.5% achieve for the S&P 500 (SPY) and it is easy to see simply how a lot QQQ rose towards different stocks in Q1. Once you examine QQQ’s beneficial properties to these of IWM (Russell 2000) or DIA (Dow Jones Industrials), the outperformance is much more superb.
Actually, some outperformance by the NASDAQ 100 is warranted, because it was the worst-performing index of the large 4 in 2022. Nevertheless, that outperformance is now reaching an excessive. Look ahead to QQQ to underperform within the coming months because the comparative unfold reconverges the extra conventional relationship.
fundamentals
Two stocks, Microsoft (MSFT) and Apple (AAPL), make up over 25% of the NASDAQ 100 Index’s weight. Additionally they make up over 13% of the S&P 500 — the primary time two stocks have been this robust since IBM and AT&T within the late Nineteen Seventies. Additionally, they’re the one stocks with a market cap over $2 trillion.
Like these two stocks, so does the NASDAQ 100 and stocks typically. Wanting on the valuations of those two mega-cap names will present a superb perception into valuations for QQQ typically.
The worth-to-sales ratio for the top-weighted Microsoft (MSFT) is now again properly above 10 and on the highest a number of since August 2022, when the QQQ peaked.
Quantity two Apple paints the same image.
MSFT’s price-to-earnings ratio is much more excessive, now at higher ranges than the earlier QQQ worth peak. All of this regardless of rates of interest rising sharply over this timeframe – which ought to trigger multiples to shrink.
Choice costs are low-cost. The NASDAQ 100 is technically overbought and basically overvalued. The mix of those two statements implies that shopping for places on QQQ is so much cheaper and much more smart now than it has been at any time this 12 months. All we’d like is for the market to return to some semblance of sensitivity to learn from a put play.
POWR Choices
What do you do subsequent?
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All the perfect!
Tim Biggame
Writer, POWR Choices E-newsletter
QQQ shares closed at $320.93 on Friday, up $5.25 (+1.66%). Yr-to-date, QQQ is up 20.71% versus the benchmark S&P 500 index’s 7.46% achieve over the identical interval.
In regards to the Creator: Tim Biggam
Tim spent 13 years as Chief Choices Strategist at Man Securities in Chicago, 4 years as Lead Choices Strategist at ThinkorSwim and three years as a Market Maker for First Choices in Chicago. He’s an everyday on Bloomberg TV and writes Morning Commerce Stay weekly for the TD Ameritrade Community. His overriding ardour is making the advanced world of choices extra comprehensible and subsequently extra helpful for the on a regular basis dealer. Tim is the editor of the POWR Choices publication. Discover out extra about Tim’s background and hyperlinks to his newest articles.
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