December 27, 2016

Shorting the NASDAQ

My trade of the year for 2017 is to short the PowerShares QQQ Trust ETF (QQQ) , which tracks the Nasdaq 100 index.

Here's my investment thesis for this play:

The Nasdaq 100 Already Has Rallied
QQQ already has risen from about $96 a share at the market's February 2016 low to around $120 today. That's about a 25% gain in 10-1/2 months, which beats the Dow Industrials, the S&P 500 and other key indices.

A Trump Presidency Brings Uncertainty
Tech companies in particular need a predictable, forecast-able, non-threatening U.S. trade policy and a consistent set of rules for their health and profits. But for now, that doesn't look like it's in the cards under the coming Donald Trump administration.

Indeed, Trump's relationship with Silicon Valley (save for Peter Thiel) appears to be strained, with tech pioneers and executives conspicuously absent from the president-elect's initial cabinet choices and other political appointments.

Sour Apple
Apple is the Nasdaq 100's largest components, representing about 10.8% of QQQ's holdings. But, of course, I'm of the view analytically that Apple Is Crapple.

Other Techs Seem Overvalued
Beyond Apple, other Nasdaq 100 components that I see as overbought include:

-    Microsoft, which makes up about 8.6% of the index.

-    Amazon, which has about a 6.4% weighting.

-    Cisco, which accounts for about 2.7% on QQQ. I've previously written that I'm bearish on Cisco on an intermediate-term basis.

Non-Tech QQQ Stocks Look Iffy, Too
Some non-tech QQQ components could weigh down the ETF in 2017 as well. These include biotech and health care companies such as Amgen, Biogen, Celgene, Express Scripts and others, which all could suffer if Trump tries to limit drug-price increases.

Comcast also represents a relatively large QQQ weighting (about 3%), but the cable giant could suffer from continued "cord cutting" by consumers.

Tax Cuts Won't Help QQQ Stocks
Trump's plan to lower the effective U.S. corporate tax rate won't materially benefit QQQ components.

After all, large tech and health care firms in the Nasdaq 100 already generally pay low effective rates (under 20%). That's far lower than the 35% statutory rate that Trump is talking about reducing.

The Bottom Line
The Nasdaq 100 has had a stellar year in 2016, but the index's prospects for 2017 have deteriorated for reasons listed above.

As a result, my 12-month risk range for QQQ is $124 on the upside and $105 to $110 on the downside vs. the ETF's current price of around $120. Shorting here would make you about 12.5% if QQQ goes down to my $105 target, but only cost you some 3.3% if the security hits my $124 upper price range. That's nearly a 4-1 positive ratio.

That's why I suggest shorting QQQ for 2017, with a $125 stop on the position.


via thestreet.com

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