The Nasdaq composite and its more concentrated counterpart, the Nasdaq 100, are in strong long-term uptrends. So why did we lighten up on exposure in QLD, a leveraged ETF of the Nasdaq 100?
While a long-term uptrend may be intact, when swing trading we also have to be mindful of the short-term trends. Especially when markets hit turbulence. Choppy action doesn't have to last very long to do a lot of damage.
Market ETFs offer an easy way to get exposure up or down in a diversified way when things are uncertain. The leveraged versions can make that exposure ramp up, or down, even quicker. Here's how we used the ProShares Ultra QQQ as an investing tool the last part of the year.
Swing Trading Example: Nasdaq 100
After wobbling most of the summer, the Nasdaq 100 reanimated in September. As the election unfolded, we took an outsize position after the Nasdaq 100 bounced from its 50-day moving average line (1). We sold some into strength a few days later and the trimming helped keep the trade positive when QLD plunged below its 21-day line (2).
We've been very willing to go in and out of the position to stay in sync with the market. Just a couple days later we reentered (3) then exited almost immediately to keep the trade positive again. It wasn't until the end of November that we established a new position (4) and held it for more than a week. Here again, we were quick to protect our profits by first selling into strength and then exiting as the Nasdaq 100 started pulling back (5).
Our exit locked in a nice gain but turned out to be premature. When the Nasdaq 100 launched back to new highs, we reestablished the position (6). But it didn't last long. A Fed reaction caused us to exit quickly (7) and reconsider how we approached the end of the year.
Looking At History
The sharp break introduced a few cross currents. The market sell-off was severe enough that usually it's a wound only time can heal. In historical studies of the Nasdaq composite in similar situations, the vast majority get back to highs within a few months but it takes its time going sideways for a while.
There are a minority of situations where the index came back immediately and continued its uptrend. Or sometimes, retook its highs immediately and then didn't do anything for a few months while it did its healing. Then there were the few situations where a full bear market ensued that required a lot more time and destruction before recovering.
We had another wrinkle too. The end of the year and beginning of the next often introduce their own volatility. Lighter trading that is susceptible to more movements, the jostling for window dressing institutional portfolios or tax-related decisions all create motivations that might differ from the usual capital appreciation goals.
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Still, the one thing that we find hard to resist is upside reversals. That's why we reentered on a recent reversal (8) but again quickly exited at the first sign of trouble (9).
It's also worth mentioning that the movement in and out might not be for everyone. Even these trades might have been better served with a buy and hold strategy. But of the recent trades since Nov. 5, four finished positive and two negative.
It also shows a willingness to be in sync with the market. An ill-timed sell doesn't prevent you from trying again. Even the next day. That flexibility can pay off in the long run.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
