UltraPro TQQQ ETF gets overbought and overvalued: what next?


The ProShares UltraPro QQQ (ETF) is having a spectacular year, helped by the strong performance of US stocks. It has jumped by 67%, beating the Nasdaq 100 and S&P 500 indices that have jumped by 21% and 16%, respectively. 

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Technology stocks are thriving

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The ProShares UltraPro QQQ ETF is one of the biggest leveraged funds in the market with over $25 billion in assets.

This fund seeks to generate returns that are three times the daily performance of the Nasdaq 100 index, which tracks the biggest tech firms in the US.

Some of these companies have done well this year. Nvidia has gone parabolic as demand for semiconductors to power artificial intelligence applications rose. Its stock has jumped by over 150% this year.

Meta Platforms has soared by over 40% as demand for its advertising solutions rose. The company is also leveraging AI to enhance its performance and reduce costs. 

Other companies like Broadcom, Amazon, and Netflix have all done well. Most of these gains have come from Magnificent 7 companies.

Federal Reserve and corporate earnings

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The TQQQ ETF has also done well because of the rising hopes that the Federal Reserve will start cutting interest rates later this year. In his statement this week, Jerome Powell noted that the bank would do that if inflation continues falling. 

Most economists expect that the Fed will either start slashing rates in September or in December. In a recent FT opinion article, Mohamed El Erian has recommended that the Fed should cut as soon as in July.

Fed rate cuts will benefit US stocks by giving money market fund holders an incentive to move back to stocks. Such inflows will be substantial since money market funds hold about $6.1 trillion in assets. 

Further, American companies are publishing robust earnings. According to FactSet, the blended earnings growth in the last quarter stood at 5.5%, the highest figure since 2020.

According to its survey data, analysts expect that the blended earnings growth for the second quarter will be 8.8%. Analysts also expect that companies will deliver strong forward guidance in these results. 

Valuation concerns remain

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Still, the TQQQ ETF faces numerous risks ahead. The most obvious one is that companies have become extremely overvalued. For example, Nvidia, which is responsible for these gains, has a forward P/E ratio of 51, higher than the S&P 500 average of 21. Its forward EV to sales figure has risen to 26, higher than its five-year average of 22.

Other companies have also become highly valued. Apple has a forward P/E ratio of 34.6, higher than the sector median of 29.2. This valuation seems to ignore the fact that Apple is no longer growing as it used to. Its forward revenue growth rate stands at just 1.65%. 

TQQQ ETF is highly overbought

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TQQQ ETF chart by TradingView

The other risk that the ProShares UltraPro QQQ ETF faces is that it has become highly overbought. On the daily chart, the Relative Strength Index (RSI) has moved to 80, its highest level in years. 

The Stochastic oscillator has also moved close to 100. Other oscillators like the MACD and the Money Flow Index (MFI) have moved to their overbought levels. 

Therefore, there is a likelihood that the index will suffer a correction in the coming months as some investors start to take profits. If this happens, it could drop to about $70.

Remember that the TQQQ ETF moved into a deep correction earlier this year when it crashed by over 23% from its highest level on March 21st to its lowest point on April 19th. In the long term, however, the ETF will likely continue rising as it has done in the past.

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