Could the NASDAQ 100 Play Catch Up?

With the DJIA on track for its best January since 1989 and the S&P 500 off to its fastest start since 1997, trader Joe Fahmy of JoeFahmy.com wonders if the Nasdaq 100 will soon play catch up.

Picture this scenario. You’re a big fund manager and you came into the year cautious because of the fiscal cliff. Now, the market has started the year off strong. You already underperformed last year (as did most money managers), and you don’t want to underperform TWO years in a row. You’re beginning to feel some pressure and finally decide to put some money to work. So you think to yourself…what’s the fastest way to do this? (HINT: Remember I said big fund manager).

The fastest way is to buy high-priced stocks. I’m not talking about valuation, I’m simply talking about stocks that trade above $100 per share. Why is this important? Because if you have to invest $50 million dollars or more, it’s a lot easier to buy 100,000 shares of a $500 stock than it is to buy 1,000,000 shares of a $50 stock.

So what are some of your liquid choices? AAPL, AMZN, BIDU, CELG, COST, GOOG, ISRG, PCLN, WYNN. And what do all these have in common? They are all components of the NASDAQ 100 QQQ. (By the way, I’m not recommending these stocks. I’m simply saying they might be choices for a big fund manager).

So far this year, the Small- and Mid-Cap indices (IWM and MDY) have outperformed the NASDAQ 100. If my guess is correct that thousands of large fund managers might need to put more money to work, then you might see the NASDAQ 100 play a little “catch up,” or maybe correct less if we see a short-term pullback. Technically, the QQQ is consolidating in a very tight range (roughly between 66.5 and 67.5). It closed Thursday, Jan. 31, at 67. If it breaks above this range, we could see a move to 70 over the near-term.

A word of caution. One could argue that the QQQ is lagging and that you are better off in a stronger index. That is a very valid point, and personally, I prefer to trade strength. However, the great part about this trade is you will probably find out soon which way the index will move out of its consolidation. In other words, if it breaks below 66, then you can use a quick $1 stop, and if it breaks above its recent range, then you can target $3 of potential upside. I’ll take a 3:1 reward to risk ratio any day.

By Joe Fahmy, Trader and Blogger, JoeFahmy.com