Even though 2019 has generally been much better for stocks than how last year ended, investors are now nervous once again. Today’s write up is to offer the argument that this malaise is an opportunity to go long the Invesco QQQ Trust (NASDAQ:QQQ) while fear is still rampant.
Yes, sentiment has recently taken a turn for the worse. And as a perfect example, today the markets are gapping down on a surprise headline from President Donald Trump that new tariffs with Mexico are coming within 10 days.
But my thesis is that this dip is technical and it will end soon and bounce back hard.
This is looking like the end of 2018, but this time it’s different because of the current position the Federal Reserve. The Fed is now recommitted to being supportive of the stock market. They are no longer looking to raise rates systematically. Instead, they’re more likely to cut rates so they can spur inflation. Oil prices are falling which further supports that theory that they cannot raise rates anytime soon.
So some of the bad news that investors are fearing now is actually good news for the indices. Sentiment is fickle so I bet that while there is short term danger, it’s an opportunity for the rest of the year.
Why QQQ Stock?
The Nasdaq is host to the most exciting companies on the planet. The largest is Apple (NASDAQ:AAPL), and it’s already cheap. Then there are the companies that make up the acronym FANG. The gang includes Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). I would even add to it Microsoft (NASDAQ:MSFT).
Those are massive companies that are doing almost everything right. Their fundamentals are as solid as they get. Apple sells at a 15x trailing price-to-earnings ratio. Most of the rest are around 30, which is still is reasonable given the amount of growth they deliver. The most expensive of them is Netflix, but that has always been the case.
So today’s write-up is to speculate that soon enough the Nasdaq will have a snap-back rally. The QQQ stock is this easiest way to capture the upside potential. The thesis is simple: There is just too much value in those behemoths below current levels. And it will require incremental new bad news for prices to fall much further.
Impact of the Tariff War
Yes, we do have an ongoing tariff war and it is likely linger for a while, especially since a new front with Mexico may be opening soon. But the stock market has a way of pricing in risk ahead of time. Meaning if we already know about it, then most of the stock damage has already occurred.
The bond market is acting like we are headed for a disaster. But for now, I see technical reasons why this bond rally should also end soon. Bond prices are headed toward a big ledge from which they fell November of 2016. This was a very important time, when President Trump took office. It took bond bulls over two years to get back to even, so odds are they take a break here for a bit. Long-term pivot zones like this are often sticky so they are resistance on the way up.
So if the bond market rally abates here, it opens the door for stocks to find footing. Also the bond rally was so fast that it left a lot short-term froth below. So it can fall fast to retest the recent breakout neckline. This would then allow for an equities rally.
The size of the QQQ rally should be at least 5% to 7% at first. There will be resistance at $180 and $182.50 per share. But then, if we get a few cooperating headlines — especially from the geopolitical fronts — then the Nasdaq bulls can breakout from $185.80 to target new all time highs. I know this sounds like I am a perma-bull here but the fundamentals are still great.
I consider holding this trade through the end of the year. Meaning I am willing to withstand some heat as Wall Street comes to terms with the headlines. I’m not a fan of betting on ETFs, but the mega-cap companies that make up the bulk of the QQQ are of such great quality that I bet they will collectively rise for years to come. Short-term dips are opportunities to go long.
So I can buy the QQQ stock itself or use options to profit from it. The advantage of holding the stock is that time is not as crucial as with options.The biggest obvious risk is from Apple. It has become the poster child for the tariff war threat. Speculation is that China will indeed retaliate using Apple as a weapon.
Even if that happens and Apple falls closer to $170 per share, there is little froth to shed from there. Buyers will step in to provide support. AAPL’s low P/E means that the math just doesn’t allow for much lower prices.
Furthermore and in spite of the geopolitical risk that still looms, the macroeconomic environment is still very healthy. We just saw a strong GDP report this week and favorable inflation reports. Yes, there are sectors in trouble — retail for example, which is reeling from horrendous earnings reports. Most of them had ample time to find workarounds for the tariff obstacles but they dragged their feet.
The bottom line is that the current level of fear in the headlines has exceeded its reality. This is more to do with fear mongering than realistic downside potential, especially in the top six companies that make up the QQQ stock. So regardless of the headlines, the math provides a good base for rallies.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can join his live chat room here.
