What a grind higher. The QQQ (Nasdaq 100 ETF) has rallied about 5% since the beginning of the year.
A slow, steady march higher as entirely too many people got stuck leaning the wrong way as the market broke out to new all time highs.
And what have we seen to start 2020?
Political risk. Impeachment. Middle East troubles.
And every headline has been shrugged off. Why? I guess you can blame the Fed, or buybacks... but here's what I think the real reason is.
Last year the market saw a return of 30%.
And if you're just a regular investor who has some retirement accounts, you probably went underweight stocks during the crash in 2018.
Or maybe your broker did. So you've got this massive case of FOMO that has built up and it has caused an environment where the market has no choice to go up.
What can take it down? From the headlines in January, it feels like we've seen it all.
Except one thing.
Earnings. Yes, the stock market is made up of companies, and these companies have to do something... even make profits!
Now let's think about these stocks:
AAPL, MSFT, AMZN, FB, GOOG
Combined, these represent over 43% of the weighting in the Nasdaq 100.
They all report earnings by the end of the month. And aside from AMZN, they have all had MASSIVE rallies.
The question now is... how much good news is priced into the earnings reports?
Take AAPL for example...
From December opex to January opex, the stock has seen a move of 14%.
BILLIONS OF DOLLARS in value has been added to the company. And when it reports earnings, it better be an amazing report otherwise you'll see profit taking.
You could even see AAPL beat and raise, but it still isn't enough, because perfection was priced into the stock. And the lack of followthrough may bring sellers out.
If you get that mechanic in just a few of those mega-cap stocks, then we have an environment where the QQQ can see a drop.
Not a crash, just reversion to the mean. Just a little rug pull to test some of the previous levels that were set recently.
The more I think about it, the more I think it's a distinct possibility.
The question now is... how do you play it?
Plenty of strategies can take advantage of it, but I've given my favorite to clients at IncomeLab.
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