You guys know the drill here, the Nasdaq 100 (QQQ) is heavily concentrated by the top 10 holdings, making up 50% of the weight and equaling $2.75 trillion in market cap. While last Friday’s 16% rally in GOOGL, and today’s 14% gain in AMZN have dominated the earnings moves, with a combined gain of about $100 billion in market cap, it’s important to note that the 15th largest weighted stock in the Nasdaq 100, Biogen (BIIB), is down 20% after posting an earnings miss. Yeah it’s one stock, but its kind of a big one, in a space that has enjoyed universal bullishness among investors who are convinced that the consolidation phases the group has been in will buoy valuations for some time, and that the sector is cheap and defensive. The one year chart of BIIB looks anything but defensive, but is certainly getting cheap(er):
The stock has nearly round-tripped the entire bubble move over the last year, and is down 35% from the all time highs made in March. I don’t want to paint all large cap biotechs with the same brush, Celgene (CELG) and Gilead (GILD) still look fairly constructive from a technical standpoint, but in a sector where binary is the norm, things can change quickly.
As for mega-cap tech….AAPL seems range-bound (but still up 13% on the year), and I would argue that the recent strength in AMZN, now up 77% on the year, FB & GOOGL, both up 24% on the year is anything but natural. Could it be a healthy rotation out of a huge winner like AAPL and some biotechs? Sure, but the concentration of gains should be a tad worrisome given what is becoming extended valuations in AMZN, FB & GOOGL that now have a combined market value of $1 trillion while old tech like CSCO, INTC, MSFT & ORCL can’t get out of their own way relative to the performance of the index.
So you get the point, a potential loss of leadership and a rotation into more speculative mega-caps could be concerning after the Nasdaq just made a new 15 year high this week. As expected, options prices are much cheaper in an index etf as they would be in a most single securities, but 30 day at the money implied vol in QQQ at 14%, a couple handles from the 2015 lows could offer an attractive way to hedge some winners or make a near term bearish bet. The one year chart below of 30 day atm iv (blue) vs 30 day realized vol (how much the stock has been moving) shows realized trading at a fairly uncommon premium to implied making options prices look cheap:
I want to look out to September expiration, which will catch the Sept 17th FOMC meeting and express a defined risk bearish view on large cap tech and biotech:
Trade – QQQ ($111.70) Buy Sept 110 Put for $2
Break-Even on Sept Expiration:
Profits: below 108
Losses: up to 2 between 108 and 110 with max loss above 110
Rationale: options prices are cheap despite the recent pickup in realized vol. This likely accounts for the cooling in systemic fears in Europe, and the recent stabilization in Chinese equities, which I suspect heats back up soon. I will look to spread on a move to the 200 day moving average (yellow below) down near 105 the low from earlier in the month.
From purely a technical standpoint I want to target $100 on the downside which should serve as decent support, very near the lows of 2015, and a breakout level from late 2014:
On any weakness we’d likely spread by selling the 100 puts or ideally a lower strike on any quick move lower.