Investing in exchange traded funds (ETFs) is a good way to try and capitalize on movements in the various areas of the market, but can ETFs help predict potential bull runs?
In comparing the S&P 500 Index and the Nasdaq 100 Index through their related ETFs, Andrew Hart for Investor Place points out that while different indexes move with the general market, the NASDAQ usually has stronger moves in both directions.
You can infer two general themes when analyzing the two ETFs, Hart adds.
1. You can identify new trends by comparing the relative strength of QQQQ over SPY, or QQQQ under SPY in the bearish case;
2. Or you can determine a real emerging trend by tracking the NASDAQ’s relative lead in the market, says Hart.
Since Aug. 31, the percent change of QQQQ vs. that of SPY has been the widest in months, which incidentally also coincided with long recent gains. Between Feb. 5 through April 23, the 15% market gain also showed a bullish divergence between the two funds.
A bearish example for this comparison was seen in late September 2008 when QQQQ started to fall behind SPY at a quicker pace.
It’s interesting to consider this and Hart makes a good case for at least watching what these funds do. To find specific areas in the market that are moving, we suggest a simple strategy such as trend following. To read more, check out our special report.
For more information on following the trends, visit our trend following category.
Max Chen contributed to this article.