The tech-driven Nasdaq 100 (QQQ) has propelled fantastic growth in 2020 thus far with the unexpected pandemic tailwind pushing this index to consistently new highs. A significant performance gap has been wedged between the Nasdaq 100 and the S&P 500, with the S&P lagging by over 21% year-to-date. This spread is illustrated in the TradingView chart below with the Nasdaq 100 in candlesticks and the S&P 500 in red.
Since the beginning of the week, this performance divergence has reversed with investors & traders beginning to pull profits off some of their most parabolic tech stocks. This is a play that many analysts have been anticipating, and earnings season is always a time for portfolio risk adjustments. I expect that the valuation stretched tech stocks will underperform the broader market through Q2 earnings month.
How To Play Earnings Season
I have been trading QQQ puts the past week and a half in anticipation of this market readjustment. QQQ puts are providing my tech-heavy portfolio with a robust hedge, locking in some of the profits I have accumulated over the past 4 months.
It may not be a bad idea to follow suit with the reversing market trends and reallocate some profits from your biggest winners such as Square (SQ) Tesla (TSLA), Nvidia (NVDA), and even the trillion-dollar-trio Microsoft (MSFT), Apple (AAPL), and Amazon (AMZN).
It may be prudent to rotate those profits into underperforming sectors like Utilities, Banks, or REITs who are all yet to recover from the COVID-crash. These three sectors all have a sizable amount of upside potential and provide cushy dividends to comfort those apprehensive investors.
Goldman Sachs (GS)
This profit-driving machine has been able to keep its bottom-line healthy while producing near-record quarterly revenues. You may hate bank stocks but it's hard to dislike this captain of high finance.
Goldman has been capitalizing on the market chaos, with its Investment Banking and Trading divisions propelling GS shares past its commercial-banking powered cohorts.
Banks have underperformed the broader market because the excessively dovish Federal Reserve's decision to drop rates to 0% (technically 0-25 bps) and keep them there through 2022. This interest rate plunge is weighing heavily on banks’ lending margins. Goldman Sachs' investment banking & trading driven strategy has allowed the firm to come out of this unexpectedly low-interest environment unscathed and ostensibly stronger than ever.
GS is 16% off its January highs, and analysts have price targets far surpassing its these January price levels. 10 out of 15 sell-side analysts are calling GS a buy today. After seeing how well this financial juggernaut navigated the worst economic quarter in over a decade, I am a buyer.
It may be time to roll some of your tech profits over to the 2020's underperformers (REITs, Banks, and Utilities). Goldman Sachs is category outperformer, but still lagging the broader market by roughly 7%. GS is an excellent place to reallocate some of those funds.
This earnings season is full of anticipation, as companies suffered through what is estimated to be the worst economic quarter since (at least) the 2008 financial crisis. Expect to see volatility pick as more Q2 reports are released.
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