Don't Short The QQQ!! Short This Instead...

As I'm sure all of you know a friend of mine - Kenny Glick - continues to make the claim that we are in a bull market. 

He says to avoid shorting the Invesco QQQ Trust Series 1 (QQQ) because the market is never going to go down... 

Me being a notorious bear in today's market, I've been hesitant to agree with him, but after spending a day pondering the idea and sentiment behind his statement - I think I'm ready to say that I agree with him... sort of. 

You see all ETFs do not trade equally, and this simple lesson will teach you how to either leverage or avoid a market hot spot. 

So, when I was a young kid, they had this announcement on the TV just ahead of the 10:00 news every night that asked parents "It's 10:00, do you know where your kids are?".  It was a simple and effective "rule" in the "book of parenting".   

There's an equally simple rule from my Book of ETF Investing... Do you know the ETF you're trading? 

If you don't, you need to... Especially in this Bifurcated Market 

Over my 25+ years of trading, I've had trades that have gone well and some not so much, all based on a single headline.   

For a short-term trader, a headline can make the difference between a good or an epic trade.  Take NVIDIA today.  Their earnings headlined popped the stock more than 30% at its highs of the day.  That's an EPIC headline trade. 

QQQ popped almost 2% on the news.  

For the investors that had no idea NVIDIA was reporting earnings, it's a windfall 

For those shorting the QQQ because it just feels "too lofty" - it's a gut punch.  But it gets worse for those bears when you look at the breadth of the QQQ gains. 

So, how can you go about avoiding the headline risk, taking yourself away from the hard euphoria-causing drug that is an unwarranted rally you're seeing in QQQ? 

Well, your best option is to dig into an ETF that doesn't allow a select few companies to carry its water... 

In this case, I'd suggest the iShares Russell 200 ETF (IWM) - full disclosure, I'm short the IWM right now and it's making me some serious cash. 

The IWM CJ, really?   

YES! It opened the day's trading more than one percent lower.   

But, why? Well, a few reasons.  First, the IWM does a better job of representing the real market.   

The market is struggling with faults over banking failures.  

The market is struggling with failures over a slowdown in the consumer, the same consumer that drives 70% of our economy. 

And yes, the market that is struggling with the very real likelihood of a recession. 

By the way, that last point?  Germany officially announced that their economy was officially in a recession this morning, the night after Fitch announced that the U.S. Debt was on credit watch.  Of course, none of that matters because A.I. 

Why you shouldn't even think about shorting the QQQs. 

As of today, there are only 25 companies in the Nasdaq 100 that are up 20% or more for the year.  It's what we've all been talking about.  The returns from the QQQ rally have come from a very defined group of stocks.  One step further, you can't stop that small group of stocks.  They're a freight train.  To short them at this FOMO moment would be the equivalent of picking up a penny in front of a turbocharged steamroller.   


Instead, if you're a trend trader like me, find the trend - and the ETF - that matches the reality of the market THAT WON'T GET TOSSED AROUND BY A HANDFUL OF COMPANIES. 

Look at the top holdings in the QQQ, it's no wonder they're dragging the index higher like a toddler with a rag doll. 

The result of the FOMO trade focusing on the top five or six companies in the QQQ is an index that is trading 24.7% higher year-to-date.  Compared to the S&P 500 Index and the Dow Jones Industrial Index - boasting returns of 7.8% and -0.2% respectively - you can see how shorting the FOMO trade just doesn't make sense. 

But for just one minute let's ask the question... what if you were worrying about the things I described above.  The economy, inflation, the consumer, a downgrade of debt or anything else that this market is running past to grab a hold of some of that A.I. goodness? How would you approach the market?  

Well, I've got you covered. 

Here's the Russell 2000 Index (IWM).  I've told my readers that this is one of the most important indices in the market right now.  Hell, we talked about why just a few days ago.  It all has to do with risk and how much risk investors are willing to take and let's face it, they're not taking risks by buying QQQ. 


Just the opposite.  "traders" are flocking to the "safety trade" that the QQQ represents.  Don't let anyone fool you by telling you that they're taking a risk buying the FOMO Frenzy of A.I. right now.  Do you know why? 

"Investors love the group think".  And that's all the current rally in the QQQ is because of group think.  I'll talk to you next week about the dangers of group think, but for now, let's return to the IWM. 

Here are the top 10 holdings of the IWM, you'll note right off the bat that you probably don't recognize them.  That's because they're not part of the FOMO rally, they're part of the economy. 

Note the total weight of this group is 3.5% compared to the 50%+ of the QQQ's top tenThis indicates that the IWM gets away from "headline risk", a simple and effective concept that gives the trader trying to prepare for an uncertain outlook the edge. 

The post Don't Short The QQQ!! Short This Instead... appeared first on Penny Hawk.

About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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