The Invesco QQQ ETF (NASDAQ:QQQ) is an exchange-traded fund based on the Nasdaq-100 Index. The Nasdaq-100 Index includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization. QQQ stock has certainly had a fabulous 2019, gaining a resounding 37% so far this year. This will likely mark the best year for QQQ since 2009 when the Financial Crisis ended. But all good things come to an end. Look for next year to be a difficult one for the NASDAQ.
The current price-to-earnings ratio for the NASDAQ 100 now stands at a rather rich 27.5. This is a big multiple expansion from a year ago when the P/E ratio stood at 20.5. This 34% expansion in the multiple accounted for 90% of the 37.5% gain in in the QQQ.
One can, therefore, thank the uber easy monetary policy from the Fed for the vast majority of the gains in 2019. Three rate cuts and QE4 provided a massive tailwind for stocks. 2020 may prove to be a more difficult year for NASDAQ names given that the Federal Reserve will likely be on hold for the upcoming year.
Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) are by far the two largest stocks in the QQQ. Combined, they account for 22% of the overall weighting in the QQQ ETF. Both of these behemoths are now near all-time highs on price. Both are, more importantly, at 10-year highs on a price-to-sales basis.
Apple checks in at a lofty 5.2 price-to-sales, while Microsoft stands at an ever more astounding 9.5. Two stocks with a market cap exceeding $1 trillion each carrying such historically extreme valuations certainly should give pause for concern. Believe it or not, AAPL and MSFT now have a combined market cap that exceeds the market cap for the entire German stock market. This is no small feat given that Germany is the fourth-largest economy in the world.
QQQ is looking tired from a technical take. After 11 consecutive up days, its 9-day RSI reached the most overbought readings of the year before weakening substantially. Previous instances when this occurred marked significant short-term tops in QQQ. The MACD is turning lower after peaking at recent extremes. Momentum is looking to finally be lessening after a major move higher. Ultimately, QQQ is trading at a big premium to the 100-day moving average. This has been a precursor to a pullback in the past.
More importantly, QQQ had a major reversal on Friday. Shares opened at the high (and new all-time highs) at $214.55 but were immediately met with selling. QQQ reversed course to close lower on the day at $213.61. This type of price action is many times emblematic of a top in the stock. The buyers have become exhausted and the sellers have taken control. It is even more powerful after such a massive straight up rally.
It’s also important to take a look at the Fear and Greed Index complied by CNN Business. Currently, the index sits at Extreme Greed readings of 89, just off the 92 levels from a week ago, but still well above the 79 readings from a month ago. This is a contrarian indicator that portends potential trouble ahead when readings reach extremes. It certainly worked as a great bullish contrarian signal a year ago when the index stood at Extreme Fear with a reading of 12. This ties nicely into the Warren Buffett adage to be “Fearful when others are greedy and greedy when others are fearful.” Now is time to be fearful according to Mr. Buffett.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in receiving finding out more about unusual option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.
