QLD Turbocharges Tech Stocks And The QQQ ETF

Summary

• Leverage in trading or investing can result in overwhelming pleasure or incredible pain due to the risk-reward profile.
• Technology stocks and the NASDAQ-100 composite are more volatile than the S&P 500 and Dow Jones Industrial Average.
• Buying technology stocks on price weakness during corrections has been the optimal approach to the stock market for decades.

Leverage is a hedonistic approach to trading or investing, as the risk-reward profile results in overwhelming pleasure or incredible pain. Leveraged derivative market tools use options and swaps to create the gearing, which comes at a price, time decay. If the price of an underlying asset moves contrary to expectations, the losses can quickly mount. Stable markets also lead to pain as leverage suffers from static price action. Meanwhile, the profits are magnified when the underlying asset performs according to expectations.

Technology stocks and the NASDAQ-100 (NDX) composite are more volatile than the diversified S&P 500 (SP500) and Dow Jones Industrial Average (DJI). The monthly historical volatility of the SPDR® S&P 500 ETF Trust (SPY) that tracks the S&P 500 was at the 13.87% level on November 14, while the DIA that follows the DJIA was 12.95%. The QQQ following the tech-heavy NASDAQ was higher at 18.26%. Since the Ultra QQQ 2X ETF (NYSEARCA:QLD) leverages the QQQ, its monthly historical volatility was 37.45%, reflecting the higher risk and potential for oversized rewards. Possible rewards are always a function of the risks.

Technology stocks experience boom-and-bust price action.

Technology stocks are volatile and can experience extreme price variance.

The monthly chart of the tech-heavy NASDAQ index shows the following downdrafts over the past years:

• After rising to a record 8,133.30 high in August 2018, the index fell 23.9% to a 6,190.17 low in December 2018.
• The February 2020 9,838.37 peak led to a 32.6% decline to 6,631.42 low one month later in March 2020.
• The most recent November 2021 all-time 16,212.23 high was followed by a 37.7% decline to a 10,092.94 low in October 2022.

The diversified S&P 500 also experienced significant downdrafts over the period but were less dramatic on a percentage basis in two of the three selloffs.

• The September 2018 2,940.91 high gave way to a 20.2% drop to 2,346.58 low in December 2018.
• The February 2020 3,393.52 high led to a 35.4% decline to 2,191.86 low in March 2020.
• The January 2022 record 4,818.62 peak was followed by a 27.5% correction to 3,491.58 in October 2022.

The overall trajectory of recoveries in the NASDAQ beat the S&P 500 on a percentage basis.

• The NASDAQ rose 58.9% from the December 2018 low to the February 2020 high. The S&P 500 increased 44.6% over the same period.
• The NASDAQ rose 144.5% from the March 2020 low to the November 2021 high. The S&P 500 increased 119.8% over the same period.
• The NASDAQ rose 43.1% from the October 2022 low to the July 2023 high. The S&P 500 increased 31.9% over the same period.

Recoveries in the NASDAQ have outperformed the S&P 500 over the recent years as investors have embraced technology stocks.

Lower highs in the NASDAQ-100 Index- QQQ tracks the tech-heavy NASDAQ

Buying technology stocks on price weakness during corrections has been the optimal approach to the stock market for decades.

The chart dating back to the mid-1980s shows a pattern of higher lows and higher highs in the technology index.

The Invesco QQQ ETF began trading on March 10, 1999.

The chart shows that over more than two decades, QQQ has made higher lows and higher highs, following the NASDAQ-100 index.

The reasons why technology stocks could rally- Earnings, slowing rate hikes, and a lack of bullish sentiment

At around the 13,780 level on November 14, the NASDAQ-100 remains in a long-term bullish trend. The following factors favor a continuation of higher lows and higher highs in the technology sector:

• Five of the top six companies by market cap, with valuations above the $1 trillion level, including Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), and Nvidia (NVDA), trade on the NASDAQ. Technology company earnings continue to support higher valuations.
• The Fed has increased the short-term Fed Funds Rate from zero percent in March 2022 to 5.375% in November 2023. While rising interest rates weigh on all stocks, the trajectory of hike hikes has slowed over the past months, with the Fed pausing at the last two FOM meetings. Stabilizing interest rates favors higher stock prices as the markets digest and adjust to the current rate environment. Fewer rate hikes over the coming months could boost stock prices, with technology leading the way.
• Markets are nervous in November 2023. The economic and geopolitical landscapes are highly uncertain. With sentiment less than bullish in the current environment, the potential for an updraft on positive news is high. The lack of bullish sentiment tends to be a factor that propels stock prices higher.

While the past price performance never guarantees the future, the NASDAQ’s higher volatility and historical trading patterns suggest it will lead a future stock market rally.

QLD is the QQQ on steroids- QLD delivers twice the returns of QQQ on a short-term basis

QQQ is more volatile than SPY, and the ProShares Ultra QQQ ETF provides double exposure than QQQ. QLD’s profile states:

The latest Seeking Alpha ETF grades are:

QLD receives the highest possible grades for momentum, dividends, and liquidity. However, D- grades for expenses and risk reflect the ETF’s relatively high cost and that time is its greatest enemy.

At the $67.60 per share level on November 14, QLD had over $4.5 billion in assets under management. QLD trades an average of around 6.166 million shares daily and charges a 0.95% management fee.

Leverage requires a plan and discipline- QLD is only appropriate for short-term long positions

QLD is a trading and not an investing tool. QQQ can be effective for medium to longer-term investment positions, but timing is everything when approaching the NASDAQ with the leveraged QLD. If the NASDAQ moves lower or remains static, QLD will lose value as it employs options and swaps to create its gearing.

Meanwhile, QLD will turbocharge rallies in the NASDAQ and QQQ ETF. During the most recent rally that took the NASDAQ-100 43.1% higher from the October 2022 low to the July 2023 high, the QQQ ETF rose from $254.26 to $387.98 per share or 52.6%, as the QQQ outperformed the index.

The chart shows that QLD rose from $32.98 to $70.74 per share over the same period or 114.5%. QLD delivered over double the percentage gain of QQQ.

Leverage exchanges more potential risk for greater potential rewards. QLD can be a valuable tool for market timing in the technology sector, but time and price stops and careful attention to risk-reward dynamics are necessary for success.