Millions of People Will Be Blindsided in 2022. Will You Be One of Them?

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It’s Time to Be Brutally Honest About the Real Problem With Invesco QQQ Trust Series 1

Americans are an optimistic bunch, which is a significant reason why they don’t like to hear about short traders. To them, it’s controversial to bet against publicly traded companies, let alone entire sectors of the domestic economy. Therefore, you’re probably not going to want to hear my take on Invesco QQQ Trust Series 1 (NASDAQ:QQQ) if you’re perpetually optimistic. What I have to say about QQQ stock isn’t pretty.

graphic of the phrase ETF sitting on a computer in front of an increasing line graph on top of a bar graph
Source: Shutterstock

As you know, investors have been looking for direction from policymakers, both of the fiscal and monetary variety. Just recently, they got it from Federal Reserve Chairman Jerome Powell – well, they got a statement from him. In reality, Powell provided the kind of guidance that strongly indicated that no one is flying the plane.

Speaking at the Wall Street Journal Jobs Summit, Powell “emphasized the economy is far from reaching full employment. He stopped short of indicating that the Fed would buy more long-term Treasurys each month as an effort to contain yields, which some investors thought was possible. Stocks turned lower after his comments, with losses accelerating in the afternoon.”

Unfortunately, that’s not what equities traders wanted to hear. After all, rising yields make growth companies look less attractive, especially during this period of uncertainty. And what is the QQQ stock but an exchange-traded fund tied to some of the most aspirational – and therefore typically non-dividend paying – technology firms?

Instead, the Street wanted to see a repeat of Operation Twist, a tactic involving the selling of short-term bills and buying long-term bonds to raise yields in the nearer term and lower them on the longer end of the spectrum. This effectively will flatten the yield curve, hopefully making QQQ stock more attractive.

And it’s not really about this ETF. Rather, investors want the Federal Reserve to gradually wean companies off the cheap money environment as we sludge our way out of the pandemic, but Powell didn’t seem to have a sense of urgency, which really hurt the market.

Consider Reducing Exposure to QQQ Stock

Clouding the narrative, though, is social media and the dissemination of investing “strategies” such as diamond hands. From what I can figure, this is a process where you never sell your target stock and ride it into the ground if necessary under the somewhat misguided concept that you never take losses if you don’t bailout.

Here’s a better approach to something like QQQ stock: use the charts. If you do, you’ll probably come to the conclusion that the market is due for a correction. Further, if you sell now and the market plummets, you’ll have funds to buy more of the stocks you want.

Of course, no one knows where the market will go. Thus, there’s a chance that it can go higher. Also, technical analysis is an interpretive discipline. Like a Rorschach test, different people may see different things.

But here’s the basic rundown of QQQ stock that I believe we can all agree on. Over the last few years, the price of the ETF has been moving higher while volume has been moving lower – in other words, volume doesn’t confirm price. This indicates a bearish outlook, something that played out like clockwork in 2018 and most recently in 2020 when the novel coronavirus hit us.

QQQ ETF chart
Click to Enlarge
Source: Chart by Josh Enomoto

In my opinion, it’s very possible that we could see a correction this year as volume is again not confirming the bullish price action of QQQ stock. More evidence comes from individual names. For instance, if you pull up the chart for Tesla (NASDAQ:TSLA), you’ll notice that from the beginning of 2020, outside of the coronavirus impact, TSLA never really breached its 50-day moving average.

Well, it did so resoundingly in recent sessions, the first real sign of weakness from the electric vehicle giant. To ignore such signs in my book isn’t very prudent.

Fundamentals May Be Ugly Too

Beyond the technical warning signs, I’m also not comfortable with the fundamentals. The statements from Chairman Powell suggest that the Fed is focusing primarily on the labor market and secondarily on the equities market.

However, the economy may not be as robust as most people think because labor market data doesn’t incorporate the vast and burgeoning gig economy. This was an issue before the pandemic. During this crisis, though, the inability to quantify gig workers presents a huge problem because policymakers may be underestimating how much pain Covid-19 inflicted.

Eventually, this pain can cause a ripple effect in the equities sector. If so, the tech-centric QQQ stock could suffer disproportionately.

And I haven’t discussed one of my biggest concerns – too much speculation in stocks, particularly through margin trading. If you crack open your history books, you’ll know that purchasing shares on margin contributed to the Great Depression as jittery brokerages imposed quick and hefty margin calls.

About the only thing that can keep QQQ stock running higher is more speculation. Personally, I don’t see it happening.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.


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