QQQ underperformed DOW and SPX by 5% in March.
· Sector specific news is not leading the decline, instead market multiples are compressing.
· This could be an indicator of further selling to come. Those with confidence in the Tech Sector should buy through any selling.
· Stock Picking is back
The Capital Asset Pricing Model(CAPM), which is used extensively in the mutual fund industry, implies that the only risk an investor is rewarded for is the market-correlated risk. Under this model, specific risks ought to be diversified away entirely, thus the market basket has the optimal risk-return proposition. As a result of the extensive application of CAPM in the asset management business, correlation between assets has increased, while focus on individual companies' business prospects has declined. The Nasdaq exchange, which has a disproportionately large tech component, is particularly risky(P/E of 21.15, relative to 16.30 for DOW and 17.69 for S&P). Thus under the CAPM model, its Beta, or market correlated return is large(although i personally cant measure it). I see the recent weakness in QQQ as an extension of declining risk appetites in the market. Funds are shifting into assets with returns closer correlated to the market, perceiving less risk. Instead, a qualitative evaluation still shows that tech stocks present the best real risk-return possibilities in the market, with little debt and sought after products. The multiple compression in Tech is not justified by intrinsic valuation concerns.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.