Unlocking the Potential of the Nasdaq 100 ETF: A Comprehensive Guide
July 7, 2023
It is crucial to bear in mind that merely purchasing an ETF tied to a particular index, such as the NDX 100 or the Nasdaq, does not guarantee returns unless one can accurately identify and capitalize on the underlying trend. Therefore, after evaluating both leveraged and non-leveraged ETFs linked to the Nasdaq and Nasdaq 100, we will explore the viability of adopting a long position in this index.
QQQ
The Invesco QQQ Trust is a widely recognized and highly liquid ETF that follows the Nasdaq 100 Index. It provides exposure to prominent large-cap growth stocks like Apple, Microsoft, and Amazon. QQQ is a non-leveraged ETF, suitable for investors seeking long-term exposure to the Nasdaq 100.
TQQQ
The ProShares UltraPro QQQ ETF is a leveraged ETF that aims to deliver three times the daily return of the Nasdaq 100 Index. It employs financial derivatives and debt to achieve this leverage, making it more suitable for short-term traders. It’s important to note that leveraged ETFs come with higher risks and costs.
SQQQ
The ProShares UltraPro Short QQQ ETF seeks to provide the inverse (-3x) daily return of the Nasdaq 100 Index. It is a leveraged short ETF designed to profit from declines in the Nasdaq 100. Due to the inherent risks of leveraged and inverse ETFs, it is typically recommended for experienced traders.
QLD
The ProShares Ultra QQQ ETF aims to provide twice the Nasdaq 100’s daily return Index. Similar to TQQQ, it utilizes leverage through financial instruments and debt. QLD is suitable for short-term traders seeking magnified exposure to the Nasdaq 100. Keep in mind that leveraged ETFs entail higher risks and costs.
PSQ
The ProShares Short QQQ ETF seeks to provide the inverse (-1x) daily return of the Nasdaq 100 Index. It is designed to profit from declines in the value of the Nasdaq 100. However, it’s important to note that inverse ETFs may diverge from their targets over longer periods due to fees and indexing costs.
Factors to Consider Before Investing in Nasdaq 100 ETFs
• The current technical indicators and momentum – Are MACD, RSI and other indicators pointing to an uptrend? Is volatility low or high?
• Fundamental drivers – Are the companies within the index experiencing earnings growth, expanding margins, increasing market share, etc., that would support higher valuations?
• Relative strength – Is the Nasdaq 100 outperforming or underperforming other major indexes? Any divergence could signal a change in trend.
• Macroeconomic factors – What is the outlook for interest rates, GDP growth, and other economic indicators that impact technology stocks?
• Risk/reward – Is the potential upside worth the downside risks and volatility? What risk management strategies would we employ?
• Time horizon – Are we investing for the short, medium or long term? Different factors matter more for each time frame.
By actively analyzing these considerations, we can make more informed decisions about whether going long the Nasdaq 100 at this particular point in time makes sense given our investment objectives, risk tolerance and strategies. The ETFs themselves are just tools – how we use them based on our analysis will ultimately determine returns.
Nasdaq 100 ETF: Capitalizing on the Right Side of the Trend
As the SPX and the NDX have refused to break down, there are likely to test their upper ranges before pulling back. The NDX has the potential to test the 13650 to 13,950 range, and the SPX 4320 to 4410. Market Update May 9, 2023
The outlook mentioned earlier remains applicable, with the NDX being the strongest index at present. As a result, it possesses a higher likelihood of testing the aforementioned range. Market Update May 14, 2023
All targets set for the NDX have been exceeded and surpassed. What stands out is the continued trend of market cycles surpassing both downside and upside targets, and we can expect this trend to persist. Why? Simply because the money supply continues to grow. As it expands, manipulating the markets becomes increasingly easy. Therefore, it is essential to mentally prepare yourself to navigate these volatile cycles, for they will prove to be highly profitable in the long run. Our stock rotation outlook is now coming into play, with weaker stocks taking the lead. Normally, this would be a bullish development were it not for the fact that bullish sentiment is currently surging.
Now that the Russell 2000 has reached the first inflexion point at 1900-1920, we anticipate a surge in volatility. Markets rarely top and drop. Instead, several false downward moves often occur before the corrective phase commences. The consecutive increases primarily influence this hypothesis in bullish sentiment readings. The sentiment stood at 47 the previous week, and this week it has risen to 49.00. This surge is remarkable, particularly when considering that bullish sentiment remained below 39 for over 18 months.
Now that the Russell 2000 has traded within the initial resistance range of 1900-1920. It could issue a false signal (head fake) before progressing towards a secondary and stronger resistance band. A head fake is where it appears the index is going to correct, only to reverse course and trend higher. This scenario is plausible, considering the NDX did the exact same thing before surging significantly higher. It has already exceeded our secondary targets by almost 1000 points.
The secondary resistance zone for the Russell falls in the 1980 to 2020 range. It needs to end the week at or above 1920 to have any chance of testing this zone.
Ideal setup: the Russell 2000 should extend the rally phase and trade within the 1980-2020 ranges. It would be truly remarkable and delightful if bullish sentiment were to trade above 50, ideally reaching 55 or higher.
For now, we recommend long-term investors consider taking some profits on tech stocks that surged due to the AI Mania-driven rally. Exercising patience and waiting for a market pullback before committing fresh funds to the Market would be prudent.
Conclusion
By carefully analyzing the technical indicators, fundamentals and macroeconomic landscape, and considering factors like risk tolerance and time horizon, investors can make more informed decisions about whether investing in Nasdaq 100 ETFs is appropriate at a given time. Non-leveraged ETFs like QQQ provide a lower-risk way to gain long-term exposure, while leveraged ETFs demand a higher risk tolerance and short-term focus.
Ultimately, simply buying an ETF that tracks an index will not guarantee returns. Active analysis, decision making and a disciplined strategy are required to identify optimal entry and exit points that capitalize on momentum shifts within the index. Market cycles will produce opportunities and volatility, so a flexible yet systematic approach incorporating risk management can help investors navigate these trends to generate profits over time.
With patience, discipline and a thorough understanding of the relevant ETFs and the Nasdaq 100 index itself, investors have a chance to unlock the potential returns available from this corner of the market. But success depends on the ability to be on the right side of the trend at the right time – and that requires going beyond simply purchasing an ETF and instead developing a comprehensive strategy to profit from short- and long-term movements in the index.
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