To The Moon

The following is an excerpt that discusses one of the hottest plays in this year's stock market, the Invesco QQQ ETF (NASDAQ:QQQ). We are anticipating a correction soon. Our main question is: how bad will it get?

Tracking & Trading QQQ

We track the Invesco QQQ ETF because it has substantially outperformed the S&P 500 since 2002 over all the 5 and 10-year rolling periods. It has done so while still diversified across the top 100 stocks in the NASDAQ.

While we usually have at least a 5% position, and up to 40%, in QQQ, because it is volatile, we can also tactically trade it. Most trades will generally last 3-6 months, but they can deviate outside that window shorter or longer.

The Magnificent 7

What we know about QQQ now, is that the mega caps have surged. The Magnificent 7 as I dubbed them, that was always destined to be co-opted, which are Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA), Amazon (AMZN), Alphabet (GOOG) (GOOGL), Meta (META) and Tesla (TSLA), has accounted for more than 70% of the return of the S&P 500.

The Magnificent 7 (Bloomberg via The Telegraph)

Microsoft and Apple are the 800-pound gorillas of QQQ at over 12% each of the total weight of QQQ. Nvidia, Amazon and Google fall in at over 6% each. Include Tesla and Meta both over 4%, and you find that the so-called Magnificent 7 account for roughly 55% of the weight of QQQ between them.

So, the question to ask, what if the Magnificent 7 as a group suffer a bear market losing on average 20% each? That would drive QQQ down a bit more than 10%. It wouldn't be sensible to think that as people sold QQQ the other stocks wouldn't suffer as well. A broad 20% would seem likely if it happened at the top.

How feasible is it that the Magnificent 7 can lose 20% on average as a group? Given that all have been at those price levels in the past two years, it doesn't seem unfeasible.

What could be the trigger or leader of such a correction?

In my opinion, Tesla is clearly overvalued by hundreds of billions - yes, billions with a B - based on likely earnings in the next couple of years. Is it worth owning TSLA at this valuation with a lot of competition coming, no excess real estate being freed up as the legacy carmakers have and no real expectation of level 5 autonomous driving this decade? I don't think so.

I've said Tesla is worth $300b to $500b numerous times in fair value land, and really, that even incorporates a lot of faith in the future. Yet, they trade at over $800 billion. Another 30% to 50% correction for Tesla does not sound far-fetched.

If Tesla suffers a large correction, would the other companies in the group necessarily give up ground as well?

Based on forward earnings, based on my own individual analysis of the companies, it would seem that each is priced for profits they will not make for 3-5 years. That is a far cry from the standard one-year forward looking approach standard in forecasts.

If Tesla suffers such a correction and the rest of the groups correct around 20% give or take, a shallow QQQ bear market again seems not only possible, but probable.

And, we should consider that once QQQ starts to correct, a lot of traders will sell. The decline would become almost self-perpetuating for a while. What retail does in response would determine whether or not more than a mild bear market occurs. If fear runs amok, prices could certainly fall further than 20%.

QQQ Technical Analysis

• QQQ is currently in a Cycle Wave 3 that should end at about $381 +/-.

• QQQ is also in a Wave 3 of a Super Cycle Wave that's off the charts in the middle $600s.

QQQ Elliott Wave Scenario 1 (Scott "Shooter" Henderson)

Notice the time frame on this one. It suggests that QQQ could be range bound until 2026 roughly between the 2021 high and the 2022 low. This is not unlike the 2014-16 market that allowed corporate profits to catch up with valuations a bit.

I don't think we should discount this scenario, but, a correction to the middle $200s on QQQ would take a lot of fear. We should be on the lookout for some event or condition that could generate that sort of fear. I don't see it out there, but that is the nature of black swans.

Shooter also showed us 5-wave and 9-wave cycles that are essentially triangle patterns that represented long periods of consolidation in a narrowing pattern before breaking out finally to new highs. Here's the 9-wave:

QQQ 9 Wave Combo (Scott "Shooter" Henderson)

Money Flow And Other Stuff

My own analysis is a bit different. I am primarily looking at where money flows are, how sentiment develops in real-time, and other factors from fundamentals to Federal Reserve policy.

On the technical side, here is my updated QQQ chart:

QQQ Money Flows (Kirk Spano)

You'll see three orange dashed lines. Each represents a level of heavy interest in the stock market. The top line is what I call bull market support.

If we are indeed in a bull market, then it's unlikely that QQQ breaks below the upper $320s. And, it might not even get that low. It could quite likely be in line with Shooter's first scenario.

The second line represents an area that the market has fought with from both directions and appears to be the small bear market scenario.

The third line represents roughly the October 2022 lows and would be a last line of defense against a deeper dive. In fact, it would not be healthy for stocks to fall that far. Why?

Look at the volume-weighted analysis on the left-hand side below the third orange support line. That's a pocket of disinterest or fear. It's very easy for stocks to fall in such areas. Think of it like an air gap. That is the path to the Jeremy Grantham Zone or Armageddon Zombie Apocalypse.

If you think the whole world is a series of bubbles right now, then you are afraid of that. I am not.

First of all, I believe enough of the bubbles have been deflated that markets that are still ahead of themselves can be dealt with in time. Even the office real estate market collapse with the regional bank impact I don't think constitutes a bubble anymore. I think it's just in a slow treatment and recovery mode. That's why I'm working with private equity to pick off opportunities.

Second, I think it is unlikely that Jerome Powell would not lower interest rates, reduce quantitative tightening and dip into his slush funds temporarily to prevent a collapse of some sort. He's as much as said so in acknowledging the 2019 Repo market problems.

So, what does that all mean for trading QQQ?

Investment Closing Thoughts

First, I think there is some level of correction coming for the QQQ. I think it's a minimum of 10% from $387 and up to a bit over 20%. That's a range of about $348 to low $300s.

So, that's where I'm setting my GTC buy orders for QQQ for 10% of my portfolio at each level. I'll adjust in real-time as we see what develops. You can certainly fudge a little higher or lower depending on your goals, outlook and especially, risk parameters.

I have sold down my QQQ to 5-10% of most portfolios, from 20-25%.

Find out how we knew to raise cash for 2022 and what we are buying for the decarbonizing, AI led, 4th Industrial Revolution.  

$Invesco QQQ Trust(QQQ)$ $Microsoft(MSFT)$ $Apple(AAPL)$ $NVIDIA Corp(NVDA)$ $Amazon.com(AMZN)$ $Alphabet(GOOG)$ $Meta Platforms, Inc.(META)$ $Tesla Motors(TSLA)$