Last night on CNBC’s Fast Money we discussed the Nasdaq 100 (NDX) closing at a new all time highs. The new highs were powered by tech behemoths of all ages. Microsoft (MSFT), Alphabet (GOOGL) and Facebook (FB) all closed at all time highs, with Amazon (AMZN) just 1% from its high made a few weeks ago.
My continued concern as it relates to the health of the rally is the performance concentration of top 5 holdings in the Nasdaq, but particularly the NDX. The top 5 holdings (AAPL, MSFT, GOOGL, FB & AMZN) in the QQQ (105 stocks total), the etf that tracks the NDX make up about 40% of the $5.6 trillion index’s weight. Year to date the index is up nearly 7%, or about $390 billion. When you take the year to date gains in market cap terms of the top 5 holdings they equal nearly $370 billion. That’s fairly astounding from a concentration point, showing what appears to be a lot of poor performance of dozens of stocks in the index, possibly masking some nasty fundamentals.
The purpose of my comments last night and in this post is not to suggest that mega-cap tech powering the index to new highs is in any way bearish, and I am certainly not trying to call a top. I’m merely highlighting that conditions now (from a concentration standpoint) are similar to the conditions that preceded market tops in March 2000 and November 2007. Too much capital was concentrated in too few stocks.
As far as what’s different this time? Well AAPL & MSFT have paid in dividends, and bought back stock easily worth more than $200 billion in just the last decade, and the combined profits of these 5 stocks are far greater than the entire Nasdaq in 2000. Investors don’t seem bothered with AAPL trading well below a market multiple or AMZN well above, or about 8x.
Financial markets seem fairly comfortable with the likely outcome of the U.S. elections in two weeks. Credit markets seem less than bothered by the 70% probability of a December 14 rate increase by the Fed, only its second in 10 years, its first in a year. So if we get decent results and guidance from AAPL tonight, AMZN & GOOGL Thursday and FB next Wednesday, then we might be quoting a series of new highs in the NDX from here till year end.
On Friday’s Options Action on CNBC, my friend, and chartist extraordinaire Carter Braxton Worth had a take on the QQQ:
My take for the balance of 2016 is constructive, assuming no major problems with Q4 guidance from the leadership. The QQQ has very healthy near term support at $115, and air-pocket down to $110, but that should serve as staunch support for the time being, and obviously not overhead resistance above:
Lastly for those of you long some of these mega-cap tech stocks with big gains, and trying to hold out to not pay taxes in 2016, short dated options prices in the QQQ are fairly reasonable, with the Dec 30th quarterly at the money straddle (the call premium + the put premium) offered at $5.80, or about 5% in either direction, basically the implied move between now and year end. Taking it a step further, for those who have a directional inclination, or considering protection, at the money puts cost about 2.5% for a little more than 2 months which includes 2 Fed meetings and the election.