Too Much Love For QQQ

By Tom McClellan

QQQ shares outstanding

The FANG stocks have been leading the market higher in 2018, and a lot of traders are choosing to tag along on that trade by buying into QQQ, the ETF which tracks the Nasdaq 100 Index (NDX).  As more traders buy into QQQ, the sponsoring firm (Powershares, part of Invesco) issues more shares in order to keep the share price as close as possible to the net asset value.

This week’s chart shows how the number of QQQ shares outstanding varies over time.  Not surprisingly, it goes up and down in sympathy with price movements.  There is nothing like an uptrend to get traders wanting to buy.  By the same token, there is nothing like a selloff to get them to want to bail out.

Because the numbers for shares outstanding vary over time, we cannot set rigid numbers for what constitutes “high” and “low”.  So I have added 50-1 Bollinger Bands to the plot of the shares outstanding to help with that job.  The “50-1” label means that it is a 50-day lookback for calculating the standard deviation, and also 50 trading days for the moving average (which is not shown).  Then the upper and lower bands are each 1 standard deviation away from that moving average.

Most charting programs will default to 20-2 for Bollinger Band settings, meaning 20 days and 2 standard deviations above and below the moving average.  I have found that the 50-1 setting seems to work well for many sentiment related indicators.

Just recently, the NDX moved up to make an incrementally higher closing high, taking the share price of QQQ along with it.  And that has led investors to chase into the rally, pushing up the number of shares outstanding to above the upper band.  That is a fairly reliable sign that the move for now has gone a little bit too far, and that the risk of a downward corrective move is now much higher.

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