Amidst all the volatility in the markets as of late, one thing has remained constant. The tech-heavy Nasdaq (QQQ) continues to be a laggard to almost every other major index both here in the US and abroad. Last week was no exception as we saw the QQQ lose ~ 2%, while the Dow (DIA) gained nearly 2.5%, the small caps (IWM) and SPX equal weight (RSP) both gained over 2% and the S&P (SPY) only lost ~ 0.2%. This underperformance is nothing new, as Nasdaq has now been underperforming most other areas of the market since late October (a market broadening out theme that 22V has steadfastly been on for months).
Besides the obvious sector culprit of software, which has massively diverged from much of the market due to AI competition concerns, I wanted to examine what else could be the reason for this stark underperformance by the Nasdaq of late. Therefore, I created an equal-weighted basket of the four largest hyperscalers (AMZN, MSFT, GOOGL & META) to see how much of an impact they have had on the overall Nasdaq since the peak. The results are rather impressive as these four names are down by ~ 7% since the start of November, while both IWM and RSP are both up by about 8%. These four stocks currently comprise over 21% of QQQ (and the net weight was likely higher before the underperformance), so it’s not difficult to see exactly why QQQ has been unable to regain its once former market leadership role.
The equal-weighted hyperscaler basket has declined by 7% since its peak and have lagged both IWM and RSP by ~ 15% since
Source: Bloomberg
The hyperscalers have sharply underperformed the S&P (SPY) as well since the late October peak
Two of the four largest hyperscalers reported their earnings this past week (GOOGL and AMZN), and in both cases their aggressive capex increases weighed further on the shares. GOOGL dropped by 3% on the two days after releasing earnings on Wednesday night and AMZN dropped by more than 5.5% on Friday after their Thursday night earnings release (even though the rest of the market staged an impressive 2% rally across the board). As concerns remain about the sizeable capex commitments by the largest hyperscalers, it appears that this group will remain under pressure until the market gets some clarity that the huge spend will pay off down the road. In the meantime, it seems that the parts of the market that will benefit from AI, as well as a robust economy, will continue to attract most of the new investing dollars. Therefore, I fully expect QQQ to continue to underperform other areas of the market (small caps, equal-weight, value) as we continue to see money come out of these still “crowded” names after years of outperformance.
If the hyperscalers were their own equal-weighted ETF, we can see that they just broke below their November lows, and this is with several other indices closing at fresh all-time highs on Friday (DJIA hit 50k, and RSP also closed at the highs). Given the 21% current weighting by these 4 names in QQQ, and the ongoing concerns for the software sector due to AI competition, I believe the odds that QQQ marks a new all-time high over the next few months seems rather unlikely. Put another way, if we assume the hyperscalers and software names continue to act as an “anchor” to QQQ, we will need a huge move higher in the other tech sectors like the semis (SMH) to reasonably assume that new highs can be made anytime soon.
The equal-weight hyperscaler basket I created closed on Friday below the November lows
Looking at the QQQ, we can see that it appears to have made a “double top” around the 635-637 area before breaking below the 100-day moving average support level earlier this past week. Even on the 2% rally back on Friday, from “oversold” levels, it remains below that 100-day moving average (a support level that held for most/all of the rally off the April tariff lows since it gapped above that level in May). Given the ongoing concerns from both the hyperscalers as well as the software names, coupled with QQQ implied volatility still remaining somewhat elevated and trading at a sharp premium to 60-day realized vol, I strongly favor adding low-cost March put spread collars in QQQ as a large-cap tech sector hedge (especially after the 2% bounce we saw on Friday).
QQQ with a potential “double-top” and even following the 2% rally on Friday it remains below the 100-day moving average support
Here is a QQQ March put spread collar trade I favor adding at this time:
Sell QQQ March 20th 640 calls
Buy QQQ March 20th 590/540 put spread
Costs ~ $2.55 (QQQ 609.65 Fri closing price ref)
Trade Details:
- Selling the 5% upside calls that are ABOVE the October and Jan highs, and following the sharp 2% rally on Friday, to buy the 50-point wide downside put spread that starts ~ 3% lower
- With continued pressure likely to remain on the hyperscalers and software names, it seems unlikely that the QQQ’s will make a new all-time high in the next six weeks (why I favor the upside call sale to help finance the downside put spread purchase)
- QQQ 2-month (March) implied volatility remains elevated and trades at a sharp premium to 60-day realized vol (another reason I suggest selling the upside calls to buy the put spread)
- Selling the upside call covers ~ 65% of the cost of the closer to the money put spread purchase
- March expiry allows six weeks of duration, and will also capture earnings from both NVDA and AVGO
- Please reach out to me or the 22V sales team for updated pricing and execution capabilities
QQQ 2-month (March) implied volatility remains elevated and continues to trade at a sharp premium to 60-day realized vol
