Update on QQQ/SPY Relative Performance
Aktualisiert
This is a daily chart of the relative performance between the Nasdaq 100 ETF (QQQ) and the S&P 500 ETF (SPY). Analyzing this trend in relative performance can help us determine the strength of technology stocks relative to the broader market.
Today, for the first time since 2021, the QQQ/SPY daily candle closed above the Ichimoku Cloud. The Ichimoku Cloud is one of the best indicators for detecting trend reversals. When a candle closes above the cloud, it is often considered a bullish trend reversal on the timeframe analyzed, and similarly, when a candle closes below the cloud, it is often considered a bearish trend reversal on the timeframe analyzed. The shaded area that constitutes the cloud acts as support when price enters from above and resistance when price enters from below.
Finishing above or below the cloud is considered "piercing" the cloud, and the most valid piercings occur on strong volume and with strong oscillator momentum. The piercing event that you see on this chart is actually quite unusual because many piercings occur when the cloud narrows. Here we see QQQ/SPY piercing the cloud while it is wide. This may be reflective of a trend reversal on a higher timeframe.
The QQQ/SPY relative performance is looking fairly bullish on the lower timeframes, here's how it looks on the higher timeframes:
Weekly Chart -
The weekly chart is still showing strong upward momentum (meaning strength in tech relative to the broader market), but it is beginning to interact with the MA Exp Ribbon (the yellow and orange lines) which will act as resistance. Volume is decreasing. Therefore, the weekly is neutral since it has both fairly bullish and bearish signals.
Meanwhile, the QQQ short derivative, SQQQ, is experiencing a breakdown in the weekly trend, which may precipitate a short squeeze. As many of you know, a short squeeze occurs when market participants who believe the market will go down and who are therefore shorting the market get forced out of the market because their stop losses trigger. This occurs because the price of the asset being shorted is rising rapidly, and in turn, this causes price to accelerate even higher. A short squeeze is a positive feedback loop that can lead to extreme price movements.
Monthly Chart -
On the monthly chart, we see two bullish signs. First, price was supported by the monthly MA Exp Ribbon, which suggests that the long-term trend of tech outperforming the broader market remains intact. See below chart.
Second, the monthly chart shows that a double top occurred, and the measured move down was completed. See below chart.
Yearly Chart -
The yearly chart is the most bearish chart of all for tech's dominance. However, very rarely is the yearly chart appropriate for taking a trade in a certain direction. See below for a simple chart analysis of why we might see QQQ's dominance wane over the coming years.
When you adjust for dividends, the chart is even more bearish. It's possible that the era of inflation and the end of "easy money" (or "Quantitative Easing") has brought about a new supercycle where tech stocks underperform relative to the broader market (S&P 500). (A supercycle refers to a trend that exists for years or decades, and is often used in the context of Elliot Wave Theory). See below.
Not all is bearish for QQQ even during a supercycle downtrend. First, the chart is merely a relative performance chart. So QQQ will still largely be going up over time, this chart just means that it may not go up by as much as the broader market (S&P 500). Most investors and traders will not even realize that this relative downtrend is occurring. To prove this point, how many of you knew that Apple has been resisted downward relative to SPY for almost two years? (More about Apple below)
Second, there will be periods of strong bounces in relative performance, like the one occurring right now, when the yearly chart hits a Fibonacci level. These will be great intermediate-term long opportunities for tech. (See chart below).
Finally, even as QQQ as a whole may underperform, some components within it might over-performance. Speaking of components, no analysis of QQQ would be complete without also analyzing Apple, the ETF's largest component, and indeed, the largest company in the world by market capitalization. Since Apple is the largest component of many ETFs and mutual funds (e.g. your retirement fund), whichever way Apple moves, the entire market will move. I recently posted this article below about Apple trying to break through resistance relative to SPY:
My conclusion in that article is that unfortunately for those who are long-term bullish on Apple, it is at best, "faking out" on its relative performance to the S&P 500. A fake-out simple means that an asset appears to break above resistance, but in fact, it is just forming an upper wick on a higher timeframe and price will fall back below. The best way to detect a fake-out is a break out in the RSI after bearish divergence has occurred, and while the RSI is in overbought territory. Although I love Apple as a company and know that it will pave the way for future revolutions in technology and help build the metaverse, it is showing definite bearish signs on the long-term charts. I guess the silver lining is that, by the time the metaverse framework is built out in a decade or so, Apple will probably be finished an underperformance supercycle, and be ready to rip during the metaverse era.
Finally, I will leave you with this note: Regardless of all of any chart analysis, the time-tested and proven winning strategy is to invest broadly in diversified asset classes over the long term (including tech which may or may not be undergoing an underperformance supercycle). This means continuing to contribute as much as possible to your retirement accounts. You should not even be trading if you're not using your money to max out your retirement contributions first. If the stock market crashes, do not stop or lower your contributions or try to pull money out because you think the world will end. Rather, continue to contribute as much as you can afford no matter what. Contributions during market downturns will buy you more shares of your retirement mutual fund relative to the number of shares your contributions bought prior to the market crash. When price rebounds (and it will) you would have been glad to stick to this time-tested investment strategy.
Today, for the first time since 2021, the QQQ/SPY daily candle closed above the Ichimoku Cloud. The Ichimoku Cloud is one of the best indicators for detecting trend reversals. When a candle closes above the cloud, it is often considered a bullish trend reversal on the timeframe analyzed, and similarly, when a candle closes below the cloud, it is often considered a bearish trend reversal on the timeframe analyzed. The shaded area that constitutes the cloud acts as support when price enters from above and resistance when price enters from below.
Finishing above or below the cloud is considered "piercing" the cloud, and the most valid piercings occur on strong volume and with strong oscillator momentum. The piercing event that you see on this chart is actually quite unusual because many piercings occur when the cloud narrows. Here we see QQQ/SPY piercing the cloud while it is wide. This may be reflective of a trend reversal on a higher timeframe.
The QQQ/SPY relative performance is looking fairly bullish on the lower timeframes, here's how it looks on the higher timeframes:
Weekly Chart -
The weekly chart is still showing strong upward momentum (meaning strength in tech relative to the broader market), but it is beginning to interact with the MA Exp Ribbon (the yellow and orange lines) which will act as resistance. Volume is decreasing. Therefore, the weekly is neutral since it has both fairly bullish and bearish signals.
Meanwhile, the QQQ short derivative, SQQQ, is experiencing a breakdown in the weekly trend, which may precipitate a short squeeze. As many of you know, a short squeeze occurs when market participants who believe the market will go down and who are therefore shorting the market get forced out of the market because their stop losses trigger. This occurs because the price of the asset being shorted is rising rapidly, and in turn, this causes price to accelerate even higher. A short squeeze is a positive feedback loop that can lead to extreme price movements.
Monthly Chart -
On the monthly chart, we see two bullish signs. First, price was supported by the monthly MA Exp Ribbon, which suggests that the long-term trend of tech outperforming the broader market remains intact. See below chart.
Second, the monthly chart shows that a double top occurred, and the measured move down was completed. See below chart.
Yearly Chart -
The yearly chart is the most bearish chart of all for tech's dominance. However, very rarely is the yearly chart appropriate for taking a trade in a certain direction. See below for a simple chart analysis of why we might see QQQ's dominance wane over the coming years.
When you adjust for dividends, the chart is even more bearish. It's possible that the era of inflation and the end of "easy money" (or "Quantitative Easing") has brought about a new supercycle where tech stocks underperform relative to the broader market (S&P 500). (A supercycle refers to a trend that exists for years or decades, and is often used in the context of Elliot Wave Theory). See below.
Not all is bearish for QQQ even during a supercycle downtrend. First, the chart is merely a relative performance chart. So QQQ will still largely be going up over time, this chart just means that it may not go up by as much as the broader market (S&P 500). Most investors and traders will not even realize that this relative downtrend is occurring. To prove this point, how many of you knew that Apple has been resisted downward relative to SPY for almost two years? (More about Apple below)
Second, there will be periods of strong bounces in relative performance, like the one occurring right now, when the yearly chart hits a Fibonacci level. These will be great intermediate-term long opportunities for tech. (See chart below).
Finally, even as QQQ as a whole may underperform, some components within it might over-performance. Speaking of components, no analysis of QQQ would be complete without also analyzing Apple, the ETF's largest component, and indeed, the largest company in the world by market capitalization. Since Apple is the largest component of many ETFs and mutual funds (e.g. your retirement fund), whichever way Apple moves, the entire market will move. I recently posted this article below about Apple trying to break through resistance relative to SPY:
My conclusion in that article is that unfortunately for those who are long-term bullish on Apple, it is at best, "faking out" on its relative performance to the S&P 500. A fake-out simple means that an asset appears to break above resistance, but in fact, it is just forming an upper wick on a higher timeframe and price will fall back below. The best way to detect a fake-out is a break out in the RSI after bearish divergence has occurred, and while the RSI is in overbought territory. Although I love Apple as a company and know that it will pave the way for future revolutions in technology and help build the metaverse, it is showing definite bearish signs on the long-term charts. I guess the silver lining is that, by the time the metaverse framework is built out in a decade or so, Apple will probably be finished an underperformance supercycle, and be ready to rip during the metaverse era.
Finally, I will leave you with this note: Regardless of all of any chart analysis, the time-tested and proven winning strategy is to invest broadly in diversified asset classes over the long term (including tech which may or may not be undergoing an underperformance supercycle). This means continuing to contribute as much as possible to your retirement accounts. You should not even be trading if you're not using your money to max out your retirement contributions first. If the stock market crashes, do not stop or lower your contributions or try to pull money out because you think the world will end. Rather, continue to contribute as much as you can afford no matter what. Contributions during market downturns will buy you more shares of your retirement mutual fund relative to the number of shares your contributions bought prior to the market crash. When price rebounds (and it will) you would have been glad to stick to this time-tested investment strategy.
Anmerkung
Just wanted to note that the above does not constitute financial advice. The part about contributing as much as you can applies only in the context of a well-diversified, low-fee retirement fund and is a long-term strategy. Traders, unlike investors, however, definitely should not keep buying as much they can as the market crashes - especially not on margin!Anmerkung
In July 2022 I noted that, at the time, the QQQ/SPY ratio was still being supported by the monthly EMA ribbon. (See the chart below)Five months later, in December 2022, the QQQ/SPY ratio has completely broken below the monthly EMA ribbon. (See the chart below)
In my opinion, this is extremely bearish for Nasdaq 100 stocks for the long term. We, as chartists, know that once broken support becomes resistance. The monthly EMA ribbon may therefore act as resistance for months, if not years, to come in terms of QQQ's performance relative to SPY.
Here's something to ponder: The above charts show extreme bearishness for Nasdaq 100 stocks as compared to the performance of the S&P 500. Yet the higher timeframe charts of S&P 500 look extremely bearish as well.
The S&P 500's poor performance for 2022 just caused a bearish crossover for the Stochastic RSI on the yearly chart of SPX. This is a rare occurrence.
While not predictive, it has sometimes preceded major economic downturns that last years.
If SPX is looking so bearish, and Nasdaq 100 stocks are looking poised to underperform the SPX for the long term. How much more downside should we expect for tech stocks?
What we could be dealing with here is something quite big.
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