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The QQQ ETF May Soon See New Lows

The NASDAQ 100 ETF (QQQ) has struggled to find its footing over the last few weeks. The last time I wrote on the ETF, I cautioned it had further downside risk, potentially falling to around $342. The ETF exceeded that and fell to a low of $334 on January 24. The shares have rebounded since, but the declines in the ETF are far from over. Specifically, as rates rise and the PE multiple of the underlying index compress.

To make matters worse, the underlying index for the QQQ ETF has seen downward earnings revisions since peaking in late September and now stand at $557.31 per share for 2022, which is down from a peak of $562.15, leaving the index and ETF trading at 26.4 times 2022 earnings estimates. While that PE ratio is down sharply, it is historically very high for a forward PE ratio. Going back to 2012 the average is just 20.8

From another perspective, the earnings yield (inverse of the PE ratio) of the QQQ ETF is now 3.8% and places the equity risk premium at 1.78%. Historically, the equity risk premium for the NASDAQ has been at 2.92%. Based on today's 2% 10-year rate, the NASDAQ should have an earnings yield of 4.92%, nearly 110 basis points higher than it where it is currently. That would push the PE ratio of the QQQ ETF down to 20.3. Assuming earnings of $562.15, the NASDAQ 100 would trade for 11,425, or 22.1% lower than its current level. That would equate to the QQQ ETF dropping to around $278.50 from its current $357.40.

Summary

The QQQ has rebounded in recent days, but that rebound is likely to fade fast.

Rates are not much higher and that will compress the PE ratio of the index.

The technical and options setup favors a revisit of the January lows.

Rising Rates

The argument for many bulls is that rates are much lower now than historically, so the higher PE ratio is justified. Newsflash, they were lower. The 10-year rate is currently trading at 2%, which is much higher than just a month ago. The average 10-year yield since 2010 has been 2.2%. The 10-year rate has quickly increased and is nearly back to being in line with its historical average.

Technical Weakness

From a technical perspective, while technically weak, the Qs aren't likely to drop 22% anytime soon and are more likely to drift lower over the next several weeks. However, it does seem very likely that the Qs not only revisit their recent lows but fall to new lows ahead of the Fed meeting in March, as investors worry about what the Fed is likely to do with interest rates.

The technical chart shows that a key level of support for the QQQ is at $352, and once that level of support breaks there is very little to hold the ETF up and from returning to its late January lows of $334.60 potentially before the beginning of March.

Resistance for the QQQ is extreme around the $365 level, and it seems unlikely that level will break. There is a lot of bearish momentum, as noted by the declining RSI. Additionally, the MACD is getting close to turning negative and rolling over again, suggesting a further loss of momentum.

Read More: https://seekingalpha.com/article/4486380-the-qqq-etf-may-soon-see-new-lows