To The Moon

30% gain by taking QQQ calls on Wednesday. Exactly how long is this raging bull market driven by mega cap growth stocks supposed to last?  ⚠️ Looking at calls above 371 and puts below 369.45 on Thursday after economic news data releases.

Fast & furious trades

When price trends higher over time, there would often be brief countertrend pullbacks along the way. Apple Inc. (NASDAQ:AAPL) has completely ignored that market truism and managed to ride this unrelenting ascent to above the definitely-not-frothy three trillion market cap.

At some point, this persistent market incline will take a pause and allow some other sectors to take over in the leadership role.  It’s worth noting that cyclical sectors like Energy and Materials outperformed the growth sectors this week, which could be an early sign of a further rotation.

Here’s a basic daily of the QQQ (NASDAQ:QQQ), including a simple Fibonacci framework using the November 2021 all-time high and the October 2022 low. 

After pulling back from the 38.2% Fibonacci level in February, the QQQ pushed back above this resistance level and continued much higher.  In the last six weeks, the Nasdaq 100 has now pushed above the 61.8% retracement level and is once again threatening to make another new high for 2023. 

Let’s look at the tech-heavy Nasdaq 100 index and investigate on four different pictures of how the next six to eight weeks will play out by starting with the most optimistic scenario, where the Nasdaq would make a new all-time in the third quarter of 2023.

1. The Super Bullish Scenario

The QQQ spent pretty much all of May and June in strong uptrend phase.  This most bullish scenario would imply that the recent trend just continues on unabated.  Given a similar trajectory, that would push the Nasdaq to a new all-time high by the end of August.

Leadership stocks like META and AAPL would have to push even higher, and we’d soon be talking about the next stock to hit the $3 trillion market cap threshold.  Other sectors like Industrials and Materials would need to start participating as well, as the market presses the long side and the strongest names get even stronger.

2. The Mildly Bullish Scenario

What if the uptrend continues, but just at a much slower pace?  Or there’s a 5-10% correction as investors take profits and initiate a pullback down to that 61.8% retracement level around $346?

The second potential scenario would most likely involve leading growth stocks to take a big-time breather, as a rotation to other sectors is good for those sectors but not as good for our heavily-growth-tilted benchmarks.  We’d still call this a bull market, but a much less exciting one.

3. The Mildly Bearish Scenario

The next option is a decline but not an overly painful one.  What if a pullback starts to really take hold, and that Fibonacci level around $346 fails to stop the decline?  If investors really get anxious, I could see deeper retracement which brings the whole “bull market” thing into question.

This scenario would probably mean that the growth leadership pulls back but also there’s a broader rotation to more risk-off positions. Defensive sectors like Consumer Staples and Utilites would thrive as the AI-driven growth trade is declared over and done.

4. The Super Bearish Scenario

You always have to consider a really negative scenario, if only to provide a stark contrast to the most optimistic options. But it is theoretically possible that we’ve seen the top for 2023. What if that was it, and we have some five standard deviation event that drops the market into a free fall?

If this AI-driven rally ends up being a massive bubble which pops colossally in the next few weeks, then we could be talking about a potential retest of the 2022 lows. Investors would flock to gold and Treasury bonds as literally nothing else seems like a good option here.

Do decide which of these four potential scenarios is most likely based on your analysis. And don’t forget to think through all the other scenarios as well. 

The goal here is not just to “be right” but to force yourself out of any preconceived biases and open your mind to different possibilities so that we can react when the market provide such an opportunity instead of getting stuck in limbo.

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