Market insights 9/1
Seasonal trends and technical indicators suggest a challenging period ahead for the QQQ, with a potential for a sustainable bottom to form by October.
Key technology stocks, including NVIDIA, Microsoft, and Apple, are currently exhibiting signs of weakness, indicating that QQQ may face continued headwinds in the near term.
Since early July, market behavior has been highly volatile, following a rally that began in April and featured only minor pullbacks. The previously consistent upward trend has shifted to significant fluctuations in both directions, complicating trading conditions. It is likely that this volatility will persist in the coming weeks.
Despite maintaining a bullish outlook for U.S. equities through the end of the year, I anticipate that the next few weeks will be particularly difficult.
A Critical Moment for Bulls The central question for QQQ is whether the bulls will step in as the ETF faces a critical test. The rally from the August 5th low to the mid-August peak was remarkable, but the current downward trend is unfolding just as quickly. It is crucial for bulls to act soon to prevent a more severe decline.
Moreover, the concerns extend beyond the price chart for QQQ. Since the peak in July, growth stocks have significantly underperformed relative to value stocks. Over the past couple of months, QQQ has lagged behind the S&P 500 by 6.6%, while large-cap growth stocks have underperformed large-cap value stocks by an even more substantial 12.6%. This indicates a clear rotation of capital out of large tech stocks—which dominate QQQ—into value-oriented sectors, such as those represented in the Dow Jones Industrial Average (DIA). While I believe this rotation will eventually reverse in favor of QQQ, I do not expect this to occur in the short term.
September: Historically Weak Historically, September has been a weak month for QQQ. Of the past five Septembers, only one delivered positive returns, with an average decline of 5.2%. February is the only other month with an average negative return, at -1.6%. The magnitude of selling pressure typically seen in September is significant.
Encouragingly, the period from October through January offers a more optimistic outlook. Historically, this four-month stretch has delivered average gains of 13%. I anticipate a similar performance this year, but in the short term, patience is advised when it comes to QQQ throughout September.
Caution on Buying the Dip While it may be tempting to buy into market declines, I do not believe this is prudent at this time. Market sentiment remains overly bullish for a rapid bottom to form, and further deterioration in stock prices is likely necessary before a sustainable base can develop.
Given that QQQ is market cap-weighted, its performance is heavily influenced by its largest components. Without a recovery in the major technology stocks, which account for nearly 30% of the index, a broader QQQ recovery is unlikely. At present, the top three holdings are all exhibiting technical weakness.
Trading Perspective: Short