The stock market rally went into pause mode in June – or at least that is the case as measured by the S&P 500’s behavior. But traders are still piling into the tech stocks, which dominate the Nasdaq 100 Index. The operative logic is to chase what is working for as long as it is working. And that logic is working at the moment.
The chase into the big tech stocks has pulled investors into QQQ, the big Nasdaq 100 ETF. That has pushed up the number of shares outstanding in QQQ to a multiyear high, well above the upper 50-1 Bollinger Band shown in this week’s chart. Jumping up above the upper band by this much hints at a short term sentiment extreme.
ETFs work differently from common stocks. When there are buyers of an ETF all piling in, that pushes up the share price. If the market price of an ETF strays too far from its net asset value, then the sponsoring firm responds by issuing or redeeming shares to put the two prices back into alignment. If there is a net issuance of shares, then that absorbs the public’s demand, and the sponsoring firm then invests the proceeds in the stocks which make up the ETF. In the case of QQQ, that means the stocks that are in the Nasdaq 100 Index.
So a very high reading for the number of shares outstanding is a sign of very high public demand to own the shares. As every good contrarian knows, when the public is piling all into one place, that place can get very crowded, which can be a sign of a sentiment excess. The time frame of such observations is a key element for analysis, and this 50-1 Bollinger Bands setting is something that I have found useful.
The Nasdaq’s data on QQQ shares outstanding go back to Dec. 2004. Here is a long-term chart of these data:
The current level of 470 million shares outstanding is the highest since 2014, but still shy of the higher highs seen in other eras. And, back in 2000 when the Nasdaq 100 was outperforming everything and gathering assets, the number of shares outstanding can be reasonably assumed to have been far higher. The data, however, just do not go back that far.
Fashions wax and wane in the stock market, and for right now the FANG-ish stocks which drive the Nasdaq 100 are the hot thing. This will not last forever, but it is working at the moment. Perhaps it is working a little bit too well, and the momentum chasers should view this as a cautious note.