I have been shorting QQQQs for a while and quite frankly not made the big bucks yet. I have done OK, since I was writing some options occasionally either on the tops or bottoms, and I usually kept the premium, since they expired in my favor. I have two arguments for shorting QQQQ.
The first is that I am an engineer, and I know a little bit about the technology business. It is very, very difficult to make money as a manufacturer, let alone for an investor. There is so much competition, and prices are falling all the time as things get obsolete. The problem with that is that there is not much real growth, since if companies would sell the same stuff every year, they would make less and less money, so they really have to develop new stuff all the time. Contrast that with an Old Economy business, where prices usually go up every year, even if the product doesn’t change much. So in technology there is a lot of effort wasted or inventory written off, and among five competitors one might make good money, but then the other four lose. It is also a sector where people don’t know much about it, and this makes it prone for hype, where everyone recommends it as the newest technology, and management takes all these bonuses and stock-options etc., and have becoming cheerleaders in promoting their stock. In the end, what counts are earnings and dividends, and I just don’t see much of that. I think the rally from the 2003 bottom was just a relief rally, and not much has changed long-term (only short-term).
The second reason is the low volatility currently on the VXN. This makes it fairly cheap to buy put options, e.g. at-the-money ones, and especially on the index instead of individual companies. My thinking is that if some companies start going down, everybody else in their wake will too, e.g. Best-Buy/Dell/Intel/Applied Material etc., so there is no need to try and pick individual companies (see 2000-2002).
There would also be more downside in the Nasdaq than in the Dow if we really drop, and some people, like Jim Puplava actually like the Dow, since the companies have more reasonable P/Es and dividends. They also tend to be multi-nationals, so a drop in the dollar might not affect them at all, and they might actually rise a bit during inflation. Sure, going long might not make you much since you might gain 5% and inflation could be 7%, but if you are short, you really show a loss of 5%.
I also shorted as much as I can of CLM which has a lot of Dow stocks and trades at 52%(!) premium above net asset value. I think this is insanity pure.
Regarding entry-points, I am not the right person to ask, and regarding the rally, I think there could be one more. But if there ever was a market-crash at all, I get more and more the feeling this could be the right time. Stocks making almost all-time highs with no fundamental improvement in sight, a housing market soon drawing everybody’s attention again, and it would only take one surprise warning of a big player (car-maker, big financial institution, INTC) and all hell will break loose.
These are just my personal opinions or feelings, so far from predicting the future. But if you ever want to insure yourself against down-side, that has to be it. If we have another 2-3 years downturn, it will be too late to do it half way through.
