Our prior thesis that the weakness in many high valuation tech stocks will ultimately find its way into larger cap issues that have benefited from a rotation, has been severely challenged by the continued relative strength of the likes of AAPL, ORCL, QCOM etc. Our bearish trade on the QQQ from early May has reached our mental stop at 50% of the premium originally spent so we will now cut our losses and re-evaluate our thesis.
Action: Sold to Close QQQ ($89.22) July 87 puts at 1.23 for a 1.17 loss
In front of the long weekend we worry about a continued creep higher which will not be kind to long premium bearish trades.
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Previous Post may 19th 2014: Considering Our Options – QQQ: July 87 Puts
A couple weeks ago we made the case why the relative weakness in the Nasdaq could continue given the failure of many of its prior leaders. We mapped out he similarities between 1999/2000 and how some of the high-fliers topped out months before the broad market measured by the SPX did in March 2000. The Nasdaq looks very different now than it did back in 2000 as the index is far more dependent on a few less volatile stocks than it was in the tech bubble, but that is also why we chose to express this bearish view with the QQQ as opposed to the SPY as those large QQQ components would likely take down the index quickly if they followed their more small cap brethren. Despite being July expiration, our trade is at a pretty important inflection point as the QQQ has retaken its 50 day moving average, looks poised to take out last week’s high at $88.61 and could see a quick move to $90.
What makes me nervous about the trade was the very thing that originally got me interested in it, the concentration of the top holdings. AAPL in-particular is 13% of the etf’s weight, and the breakout above $600 into next month’s developers forum and their 7 for 1 stock split could could mean the stock move even higher.
With the etf at $88.25 the July 87 puts are worth about 1.70, or about .70 below what we paid for them. We are going to keep a close eye on these, as a we stated we will likely cap our losses at 50% of the initial premium. That stop would also coincide with a confirmation of a breakout from recent weakness.
Not doing anything here but keeping an eye out.
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Original Post May 2nd, 2014: New Trade – Nasdaq 100 (QQQ): Queueing Up
There have been lots of calls of late how the current set up in U.S. equities reminds those with a sense of history of other periods that came before some precipitous market corrections. While history is fine and good, and while it’s never really “different this time”, the way that things play out are not likely to play out exactly as they have in the past.
As someone who lived through the dotcom boom and bust of the late nineties/early 2000s, it is hard to miss certain similarities of the recent price action in some of the mania stocks/sectors within tech and biotech.
Back in late 1999, a handful of the stocks that garnered a good bit of attention went parabolic late in the year, only to put in their all time highs, well before the broad market topped out in March of 2000.
Three charts below show this in AMZN, QCOM & YHOO, with the white circle showing the all time highs in the respective stocks, while the second red circle corresponds with the actual top of the broad market.
AMZN 1999 through 2000:
QCOM 1999 through 2000:
YHOO 1999 through 2000:
By no means am I calling a top here, especially as the SPX consolidates within 1% of the recent all time highs. The chart below since the start of 2013 shows the clear continued uptrend, and what appears to be the building of steam for a breakout to new highs.
So I bring the comparison up from the 2000 top because we have seen a rolling sell off in high valuation stocks that really started in the last few months, after many high valuation stocks of this area went on parabolic moves, defying gravity and logic.
The obvious examples now would be FB gaining 66% from the lows in November 2013 to the highs in March, now down 17% from the highs showing poor relative strength. Then there is TWTR which nearly doubled from late November into year end, and since having round-tripped the entire move. And lastly let’s use AMZN (which will likely be used for this sort of comparison for the next 50 years). The stock went up 45% from September 2013 to its recent highs in January, and now has also round-tripped nearly the entire move.
So you probably get the point. But I am not going to focus on the SPX. Why? Because it acts like a safe haven asset. Obviously if the market turns, the SPX will join the party, but the relative weakness in the Nasdaq 100 is what you want to press on the short side. The QQQ is interesting because it is very levered to its top 10 holdings which make up almost 50% of the weight of the entire index, meaning the other 90 make up about 50%, and have far less impact on the movement. It is also important to note that Apple, Microsoft and Google alone make up about 25% of the weight of the entire index.
So here is the thesis – if high valuation tech stocks keep rolling, then large caps will be sure to follow suit soon enough, and with an etf like the QQQ so levered to such a few names, I like pressing relative weakness as opposed to trying to pick a top in relative strength like the SPX.
There have been lots of charts thrown around lately suggesting a potential head and shoulders formation:
Moreover, the QQQ is now testing its downward sloping 50 day moving average, where it has found resistance over the past 2 trading sessions. The 50 day ma is downward sloping in QQQ for the first time since late 2012, so it’s certainly a change in trend.
Trade: QQQ ($87.70) Bought to open the July 87 put for 2.40
Break-evens on July Expiration:
Profits: below 84.60
Losses: btwn 84.60 and 87 lose up to 2.40
Rationale: For a little more than 3% of the index, this put could be nice protection against long tech stocks or an outright bearish bet. With 30 day at the money implied vol in a good bit from the recent highs, we chose to buy the puts outright and will look to spread at the recent lows around $84. Looking at the one year chart below of 30 day at the money iv (blue) vs realized (white) it shows the prices of options relatively cheap to how much the etf has been moving of late. If the QQQ were to have another leg down, this disparity would add the value of the options that we own and help off set some decay while making the possibility of spreading more attractive than it is now.
