Gregory W. Harmon, CMT, CFA, and Founder and President of Dragonfly Capital Management, provides expert technical analysis of securities and markets. He has over 25 years of trading experience at BNP Paribas, State Street and JP Morgan.
This past weekend in my Macro Week in Review/Preview for clients I noted that for the second week in a row the markets looked bullish but with the Nasdaq 100 (QQQ) lagging the S&P 500 (SPY), and Russell 2000 (IWM). In fact it is also lagging the Dow 30 (DIA) and Dow Transports (TRAN). If you take a look at the performance chart below since January 2nd the Nasdaq has been moving sideways while every other index has been rising. There is no rule that says that this
cannot persist, but like the stubborn little kid that does not want to follow the rest of the family, when left alone long enough it will likely try to catch up. So how do you prepare for this to happen? Well there are several ways. The simplest is to just prepare to buy the ETF $QQQ when it breaks the range over 67.50. But you could also reduce some risk and play it as a pairs trade. Sell one of the indexes that has been a high performer on a dollar for dollar basis against a long position in the
$QQQ looking for a mean reversion. Or if that is too much trouble managing two positions, use options and buy calls in the $QQQ to limit your risk to the premium paid and at the same time increase your leverage to an upside move. With IBM and Google both reporting Tuesday night and Apple due to report Wednesday after the close, the timing seems right.