There has been an enormous divergence between US indexes amid one of the most tumultuous years in stock market history. In 2020, the tech-driven Nasdaq 100 has rallied 16%, while the S&P 500 is down over 3%, and value-driven Dow Industrial Average has lost 9%. According to a recent WSJ
article, this is the most substantial Nasdaq advantage since 1983 (when tracking year-to-date performance to late June).
Below is a YTD chart I created with
TradingView charting tool, comparing the Nasdaq 100 (candlesticks), S&P 500 (red), and the Dow 30 (orange).
Now the question we need to be posing to ourselves as investors is whether this index gap is warranted?
What's Driving The Nasdaq?
The Nasdaq 100 is being driven by the biggest and baddest tech giants that have been provided a rare tailwind by this medically induced economic coma. The three tech giants, Apple (
AAPL Quick Quote AAPL - Free Report) , Microsoft ( MSFT Quick Quote MSFT - Free Report) , and Amazon ( AMZN Quick Quote AMZN - Free Report) , make up roughly 34% of this index, and each of these stocks continues to hit all-time highs as the pandemic further illuminates the necessity of these businesses to society.
The US would not have been able to function during the stay-at-home initiative without these innovation-driven enterprises' essential products and services. Whether it was Apple's iPhones, which have been seeing more screen time than ever before, Microsoft's portfolio of crucial cloud products, or Amazon's digital shopping center that the world has been forced to rely on more than ever.
These are not the only tech-oriented enterprises that have been provided with a tailwind. In fact, there are a significant number of tech stocks, big and small, that are sitting at all-time highs today.
The Fed's recently announced it planned to extend its current 0-25 basis point interest rate through 2020 for its benchmark fed funds rate. This means that these growth-oriented stocks are actually more valuable today than before the pandemic because of the way that analysts discount future cash-flows (utilizing long-term interest rates).
The Nasdaq 100 at all-time highs is justified not despite the pandemic but as a result of it.
What To Do
I'm not sure how much further this rally can drive, with the equity beginning to look quite frothy. Technical indicators are starting to point towards an overbought market. I would wait for a market pullback before considering putting a position on any of these big tech stocks.
I'm not selling stock because if I've learned anything amid this COVID trade, it's don't fight the Fed. Still, chasing a rally this extensive in the highly volatile and uncertain market we find ourselves doesn't appear logical.
I would consider selling some out-of-the-money covered calls on your biggest winners if you're looking to make some protected profits (remember each call option contract is for 100 shares, so you need at least 100 shares of any one stock to sell covered calls). I'm assessing the options market and looking to buy some puts on the Nasdaq 100 ETF (
QQQ Quick Quote QQQ - Free Report) to lock in my tech gains if the market rally drives much further.
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