On this Monday’s Fast Money on CNBC we started off the conversation talking about Apple (AAPL) nearing the $800 billion market cap mark, and what I believe is sentiment towards the shares that is quickly approaching unsustainable levels, hitting a fever pitch surrounding rumors of involvement in cars, increased capital return and the impending launch of their foray into the nascent wearables market with the Watch.
Regular readers know that I am a very happy long time AAPL customer, but I currently have a distaste for the mania around the stock. I get the mania around the products as I probably have close to 20 in my home, but as the stock’s 45% sell off from its 2012 highs to its 2013 lows reiterates, manias come to abrupt ends.
Although, they can start over again. The stock is up more than 125% from its 2013 lows, and up 18% on the year, gaining close to $130 billion in market cap in the last two months alone. To put this move in context there are only 30 stocks in the S&P 500 that have market caps of $130 billion or more, and AAPL has more cash on their balance sheet than 480 companies in the S&P 500’s market caps.
Ok. So what does that all mean? For an index of 500 stocks this is less impactful as AAPL makes up about 4% of the entire index. But for the Nasdaq 100 (QQQ), it is getting to levels that could be disturbing if there was ever an event for investors to sell AAPL, as the stock makes up 15% of the weight of the index/etf.
So with all this talk about Nasdaq 5000, I want to get back to the Fast Money discussion about AAPL and what I feel is a potentially dangerous concentration of the top holdings of the Nasdaq 100. Watch here (the really good part at 2 min mark):
My main take-away is simple, the rally in the Nasdaq 100 is becoming increasingly narrow, as the top five holdings (AAPL, AMZN, FB, GOOGL, & MSFT) make up about 30% of the entire index, the top 10 make up 50% and what’s apparent is that fewer and fewer stocks are doing more and more of the heavy lifting. The top five QQQ holdings have nearly $2 trillion in market cap, nearly equal to the remaining 90 stocks. That was a mouthful, but you get the point.
So let me rip through a few other things that are bugging me about the Nasdaq 100:
-The year to date rallies in stocks like AMZN, LNKD, NFLX and TWTR up between 15 and 40% are clearly impressive, but it’s important to remember that these stocks all trade at ridiculous multiples and were huge under-performers last year. Could this be a last dash?
-MSFT. The company’s results and guidance reported in late January had the stock very near bear market territory of down 20% from the 15 year highs made in November. Despite the stock’s 10% bounce from the January lows (this morning I closed a short term bullish trade, read here) it has now lost momentum and now is forming what looks to be the ominous “death cross” where the stock’s 50 day moving average (purple below) crosses below its 200 day moving average (yellow below). Losing one of last year’s massive tech winners would not be a good sign for the breadth and sustainability for the rally:
-Semiconductors seem to also have waning momentum. Despite the SOX at all time highs some its large components like INTC and MU, much like MSFT are down on the year, and under-performing its peers and the broad market. On numerous occasions of late we have highlighted massive opening short dated put buying in the Semiconductor etf, the SMH:
Tuesday Feb 24th: When SMH was $56.28 a trader paid 1.35 for 50,000 Apr 55 puts for 1.35.
Thursday Feb 12th: When SMH was $55.64, a trader paid 1.03 for 45,000 March 54 puts to open
Friday Feb 13th: when SMH was $56.28 a trader paid 1.02 for 50,000 March 55 puts to open
If you are keeping track at home, MU just made the “death cross”. We currently have a bearish position on in MU from two weeks ago (New Trade – MU Shu Put):
So to sum up. AAPL’s concentration and unnatural sentiment should scare the crap out of investors as it seems few have a care in the world with most every major equity index at or approaching new all time highs. Also, you have a recent resurgence of some bubble stocks while you have under-performance coupled with potentially nasty technical formations in some mega-cap prior market leaders.
So I am not screaming at you to sell your tech stocks, I don’t believe they are a bubble in 2000 terms, but the risks in many ways don’t seem too dissimilar to me. I think the likelihood of tech stocks in their current form and valuation causing the sort of correction it did in 2000 is not great but could clearly be a main component of a sustained correction given the fragility of the global economy.
So what’s the trade? As protection or an outright bearish play I like:
TRADE: QQQ ($109) Buy to Open May 108 / 98 Put Spread for 2.00
-Buy to open 1 May 108 put for 2.70
-Sell to open 1 May 98 put at .70
Break-Even on May Expiration:
Profits: gains of up to 8 between 106 and 98, max gain of 8 at 98 or below
Losses: up to 2 between 106 and 108, max loss of 2 above 108
Rationale: I have about two and half months for this trade to break-even down 3% at the very least. I like those odds. I would also add that the choice of strikes as the break-even level of 106 (green line) is at the prior breakout level on the chart, and then the short strike representing a level that should serve as decent support in and around the 200 day moving average (yellow line):