April was a lackluster month for major benchmark indices such as
the Dow Jones Industrial Average and the S&P 500. For the
month, the Dow and S&P 500 reported only modest gains of 0.8%
and 0.6%, respectively.
Nonetheless, the main point to be noted was that after struggling
for almost four months, the Dow finally managed to close at a new
all-time high of 16,580 on the last day of April. The Dow had
clocked its last high on December 31, 2013.
April was also pretty volatile for the tech-heavy Nasdaq. Thanks to
intense selling pressure in Biotech and Internet stocks on
valuation concerns, Nasdaq slipped 2% last month (read: 3 Hit and
Flop ETFs of April).
These high flying momentum stocks, which defied gravity last year
clocking spectacular gains, have been punished by investors over
the past couple of weeks. Apart from lofty valuation concerns, a
slew of downbeat economic numbers and renewed geopolitical tensions
pertaining to Russia also led to the plunge.
Some of the top holdings of the Nasdaq index, such as Google,
Amazon, Twitter and Facebook have all shed more than 3%, and for
some, losses have even been as deep as 15% in the past two
months.
Furthermore, the technology sector hasn’t contributed much to the
overall earnings growth in recent quarters. The same trend was
witnessed in Q1 as well. Total earnings for the 83.9% of the
sector’s total market capitalization that have reported results
were up 5% on 4% higher revenues as compared to 6.3% earnings
growth for the sector in the sequentially preceding quarter on 4.5%
higher revenues.
Moreover, with more than half of the S&P 500 members having
reported their earnings for the first quarter of 2014, we have seen
a fall in consensus estimates for the second quarter too.
Total earnings for this quarter are currently expected to be up
4.2% from the same period last year, as opposed to the 5.5% growth
rate that was predicted about a month ago (see 3 ETFs Hitting
All-Time Highs in Rocky Market).
Further, it might be difficult for the stock markets to continue
with their rally this year, given the steady reduction in Federal
Reserve's monthly bond purchases. The Fed has cut its monthly
asset-purchase program by another $10 billion to $45 billion.
Also, the well-known trading adage, "sell in May and go away" might
work perfectly for U.S. equity markets this year. The strategy
suggests that historically equity markets have underperformed
during the summer months (from May to the end of October), and as
such, investors would be better off reducing their exposure to
stocks in May.
In fact, the equity markets have underperformed bonds as well
during this period over the past 36 years. While the S&P has
returned a total 3.3% from May through October, the Barclays
Aggregate Bond Index has returned 7.6% in the past 36 years during
the same months, according to Sam Stovall, chief U.S. equity
strategist at S&P Capital IQ.
Moreover, with mid-term elections due this year, investors might
see volatility in the months ahead, further adding to the appeal of
short or lower risk investments during the summer (read: Sell in
May and Go Away with These Inverse ETFs).
Given the broad based tech and biotech sell-off in the past two
months and a not so promising overall picture of the equity
markets, investors wishing to bet against the Nasdaq can also
consider the below-mentioned inverse or leveraged ETFs, any of
which could do well if more pain hits the Nasdaq market in the
weeks ahead:
ProShares Short QQQ (
PSQ)
Launched in June 2006, PSQ provides inverse exposure to the daily
performance of the NASDAQ-100 Index which includes 100 large-cap
non-financial companies listed on The NASDAQ Stock Market based on
market capitalization.
As such the index provides exposure to industry groups such as
computer hardware and software, telecommunications,
retail/wholesale trade and biotechnology.
The index has the highest exposure to Apple (11.92%), followed by
8.47% exposure to Microsoft and 7.77% to Google. Amazon, QUALCOMM,
Intel, Facebook, Gilead and Comcast are some of the other stocks
included in the top ten holdings of the index.
Sector-wise, the index has 39.67% exposure to Technology stocks,
followed by 33.65% to Communications, 18.13% allocation to Consumer
Staples and 7.36% exposure to Consumer Cyclical.
The fund typically gains short exposure to the index by entering
into swap agreements and future contracts with various financial
institutions (see all the Inverse Equity ETFs here).
PSQ charges 95 basis points as fees and manages an asset base of
$266.5 million.
ProShares UltraShort QQQ
(
QID)
For investors having a more bearish view on the Nasdaq 100 index,
you can consider QID, which is designed to provide twice the
inverse exposure to the performance of the NASDAQ-100.
The fund has an asset base of $360 million and charges 95 basis
points as expenses. The product also has a decent average volume of
more than 6 million shares traded a day.
UltraPro Short QQQ (
SQQQ)
Launched in September 2010, the fund seeks to deliver thrice (3x or
300%) the inverse (opposite) return of the daily performance of the
Nasdaq 100 Index, before fees and expenses.
The fund too has the same expense ratio as the above two products
and has amassed $275 million since inception.
Bottom Line
Though one can surely consider any of the above three ETFs for
gaining short exposure, investors should, however, note that the
above products are not suitable for long-term sell or hold purposes
as it is rebalanced on a daily basis. Instead, investors could make
a short-term play on them if they believe that weakness is coming
this summer for this important market index (Zacks doesn’t rank
inverse and leveraged ETFs in view of their short-term performance
objectives).
Want the latest recommendations from Zacks Investment Research?
Today, you can download
7 Best Stocks for the Next 30
Days. Click to get this free report >>
PRO-SHRT QQQ (PSQ): ETF Research Reports
PRO-ULSH QQQ (QID): ETF Research Reports
NASDAQ-100 SHRS (QQQ): ETF Research Reports
PRO-ULS QQQ (SQQQ): ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment Research
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days. Click
to get this free report
ProShares UltraShort QQQ (AMEX:QID)
Historical Stock Chart
From Nov 2024 to Dec 2024
ProShares UltraShort QQQ (AMEX:QID)
Historical Stock Chart
From Dec 2023 to Dec 2024