In case you missed it, the Nasdaq Composite is at all time highs. And this time is very different. The index’s rise from about 1300 in late 1998 to just above 5000 in early 2000 was powered by stocks like Cisco (CSCO), Dell Inc (DELL), Intel (INTC), Qualcomm (QCOM) and Yahoo! (YHOO). Collectively those companies had a fraction of the profits and sales they do today.
Despite some fresh faces, Nasdaq leadership looks fairly similar in make up, but with one massive difference this time around, huge profits and sales. The top 5 stocks by market cap in the Nasdaq Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), Amazon (AMZN) & Facebook (FB) have a collective market cap of $2.3 trillion (about 30% of the index) and expected combined ebitda of $175 billion in 2016. They have a collective cash hoard (net of debt) of $315 billion. These stocks ARE the market. I may be telling you what you already know, but if you are investing in the Nasdaq Composite you need to be comfortable with the expectations for these tech behemoths.
The concentration of these names in the Nasdaq 100 (NDX) is even more pronounced, with these 5 stocks making up about 40% of the QQQ’s (etf that tracks NDX) weight.
It’s not just on a long term basis that the QQQ is at a pivotal level. After a straight line higher since late June, the index is now consolidating just above the 2015 highs. A successful hold and there’s no overhead resistance to look towards. A break below and it could be back in a range it’s established over the past 2 years:
For those looking to make near term directional bets in the QQQ, short dated options prices appear cheap, with 30 day atr the money implied volatility (blue below) just above 52 week lows, but importantly, realized volatility (white below – how much the etf has been moving) has fallen off a cliff since the end of earnings season in early August:
November is the month to own in volatility terms, no matter what your directional bias, as it will catch most of Q3 reporting season and of course the presidential election. Selling Sept to fund owning Nov is an options trading strategy that we are likely to employ in the coming days. It’s my view that Sept rate hike expectations will drop meaningfully in the coming days as the Fed is once again all bark and no bite. Sept is then likely to remain fairly calm into quarter end as large capital pools keep the quarterly performance intact (SPX up 3% & Nasdaq up nearly 8%). And then we could see uncertainty rule for a bit unless we have a growing sense of how the election will play out.