The Nasdaq is inching toward heights not seen since the dot-com boom. However, the back-to-back gains and upward momentum look overbought, so exchange traded fund investors may want to hedge their bets.
The PowerShares QQQ (NasdaqGM: QQQ), which tracks the Nasdaq-100, has steadily increased over the past few weeks, rising about 6.3% over February. The upward trajectory has pushed its relative strength index toward potentially overbought territory. [Broad Benchmark ETFs Are Breaking Out]
“The Nasdaq composite has risen the last 16 of 18 days, momentum is overbought, and we’re within three to four days of triggering signs of exhaustion,” Mark Newton, chief technical analyst with Greywolf Execution Partners, said on CNBC. “That means this move will likely need to be consolidated at some point before it can move higher.”
Moreover, the Nasdaq Composite is coming up against a psychologically important 5,000 mark. Consequently, some may be tip toeing around the level while others may see an opportunity to aggressively bet against the index.
“Whenever you are looking at those all-time highs, it becomes a big deal, and markets can get tired when they go after that,” Jim Iuorio of TJM Institutional Services said on CNBC.
Consequently, Iuorio advises active traders to short the Nasdaq and play the potential short-term dip in the Index. Over the longer term, though, Iuorio remains bullish on the benchmark.
For those who want to hedge against a potential pullback in the Nasdaq, there are a number of inverse or bearish ETF options that capitalize on market turns. The ProShares Short QQQ ETF (NYSEArca: PSQ) takes the inverse or -100% daily performance of the Nasdaq-100 Index. [Correction Prep With These Inverse ETFs]
The more aggressive trader can also juice returns through leveraged plays. For instance, the ProShares UltraShort QQQ ETF (NYSEArca: QID) tracks the double inverse or -200% performance of the Nasdaq-100, and the ProShares UltraPro Short QQQ ETF (NasdaqGM: SQQQ) reflects the triple inverse or -300% of the Nasdaq-100. However, potential traders should be aware that these ETFs show higher volatility and come with greater risks.
PowerShares QQQ
For more information on the Nasdaq, visit our Nasdaq category.
Max Chen contributed to this article.