Stock Market’s Action Signal Is Firing

Is the iconic Invesco QQQ Trust (QQQ) trying to party like it's 1999?  

And for how long?  

Since QQQ debuted in 1999, a year before the dot-com bubble burst, it has had an unspoken feud with the SPDR Dow Jones Industrial Average ETF Trust (DIA). Their respective issuers have been among the leading exchange-traded fund providers for a long time, and currently rank fourth and second, respectively.  

But unlike the Dow and Nasdaq, which tend to move in sync, QQQ and DIA frequently diverge at poignant moments in time, including this one, because of how they are constructed. QQQ is largely driven by big tech stocks, while DIA reflects traditional “blue chips,” including a few tech icons.  

The typical pattern is for QQQ to outperform shortly before a major market decline, for DIA to outperform during the bear period as a perceived “flight to quality” takes over, and for QQQ to resume its outperformance coming out of the decline as investors sense an “all clear” signal. 

As of May 26, the current six-month outperformance of QQQ over DIA was more than 24%, one of the highest on record. QQQ was up a whopping 31% year to date through Memorial Day, while DIA gained less than 1%, despite its common holdings Apple and Microsoft being up more than 35%. 

This means that something rare and historic is happening. In studying the history of six-month rolling returns since March 1999, the average spread between QQQ and DIA is a mere 1.6%.  

Over nearly a quarter-century, a major market event was close at hand most of the time that QQQ beat DIA by at least 10% over a six-month period. This happened in late 1999, the summers of 2008 and 2018, and early 2020.  

This “action” indicator crossed over 10% again on April 27 as the Nasdaq 100 soared and the Dow barely budged. 

Spread Could Broaden

Still, the spread between the two indicators could continue to broaden. In the six months through early March 2000, right at the top of the dot-com bubble, QQQ bested DIA by over 90%. This calls for careful decision-making. 

ETF investors have many ways to express their views on this relationship. Here’s a partial roster of QQQ- and DIA-related ETFs, in addition to those two, for consideration moving forward. 

The ProShares Short QQQ (PSQ) and the ProShares Short Dow30 (DOG) are single inverse ETFs, which aim to perform opposite QQQ and DIA, respectively. So, if an investor owned QQQ and DOG, they would essentially be trying to profit from a continuation of the scenario we’ve seen so far in 2023. 

The Direxion NASDAQ-100 Equal Weighted Index Shares (QQQE) and the First Trust Dow 30 Equal Weight ETF (EDOW) are equal-weighted versions of the Nasdaq-100 and the Dow. For investors who like one index or both, this allows them to own the stocks in those indexes, without the top-heavy nature they both exhibit, with a small number of stocks taking up a big chunk of the assets. 

And, the Global X NASDAQ 100 Covered Call ETF (QYLD) and the Global X Dow 30 Covered Call ETF (DJIA) are ETFs that take the Nasdaq and Dow, respectively, and sell call options against them to generate a high level of so-called “premium income.” By doing so, they tend to give up the majority of the upside potential of the stocks in those indexes as a trade-off for the higher cash flow received. 

QQQ and DIA are a very intriguing pair of ETFs to watch. Their history around major market tops and bottoms is something investors and financial advisors should be tracking closely.