The Tech Stock Surge: Is it Time to Take Profits?
Welcome to Extreme Investor Network, your go-to resource for insightful investment strategies and timely market analysis. This week, we’re diving into the remarkable rise of technology stocks, especially the Invesco QQQ Trust ETF (QQQ), which recently soared to a new all-time high. But with such bullish sentiment in the air, is it time to consider booking some profits?
A Five-Year Doubling: The Nasdaq’s Meteoric Rise
This week, the Nasdaq Composite Index shattered the 20,000 mark for the first time, an incredible feat considering it took over 20 years to reach this milestone for the first time in 2000. The fact that it doubled in just 4.5 years since hitting 10,000 in June 2020 is astonishing and leaves many analysts questioning how sustainable this growth is.
While it’s easy to celebrate these new highs, a closer look at market breadth reveals a concerning pattern. An increasing number of S&P 500 stocks are underperforming—outnumbering those that are rising for an alarming nine consecutive sessions. This hasn’t happened like this since September 2001, prompting fears of a potential downturn, as that snapshot saw the QQQ plummet 35% over the subsequent year.
MicroStrategy: A Potential Indicator of Caution
The spotlight is also on MicroStrategy (MSTR), a company that has pivoted from a software firm to the largest corporate holder of Bitcoin, amassing over $40 billion in cryptocurrency. There are rumors that MicroStrategy may be admitted to the Nasdaq 100 during its annual reconstitution on December 13, further fueling the excitement around tech stocks.
However, this prospect is a double-edged sword. MicroStrategy’s primary business, software, accounts for a mere 5% of its value, raising red flags about how its inclusion could distort the overall index. As of December 30, 2022, MicroStrategy’s market cap was just $1.6 billion, ballooning to $89 billion in a mere year—a staggering growth that, while impressive, also leaves many investors wondering about the stability of such valuations.
A Unique Trading Strategy: Zero-Cost Options
Given the current landscape, implementing thoughtful strategies is essential. One approach worth considering is a zero-cost options strategy, particularly for those eyeing the QQQ.
For example, one could sell the QQQ 1/17/2025 $549.78 call for $3.20 while simultaneously buying the QQQ 1/17/2025 $510 put for the same amount. This creates a ‘risk-reversal’ strategy, allowing you to potentially profit if the Nasdaq 100 cools off by more than 4% in the coming months. The balance of these trades means you establish a position without any upfront costs.
If the price were to fall below $510, the potential for profit becomes unlimited. However, should the QQQ continue to rise, managing the short naked call at $550 will become necessary, especially as this represents only a 3.5% increase from current levels.
The Bottom Line: Caution Amidst Optimism
In the frenzied landscape of tech stocks, it is essential to remain vigilant. While the bullish momentum seems unrelenting, the indicators suggest caution—especially with a declining breadth among S&P 500 constituents and the inclusion of companies like MicroStrategy in the Nasdaq 100.
At Extreme Investor Network, we believe in empowering investors to navigate the complexities of the market with informed strategies. As always, before making significant investment decisions, consult a financial advisor who understands your unique circumstances.
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