Is QQQQ Shortable?

[codehappy]

Quote from MustPlayOptions:

Thanks,

I'm asking because I noticed QQQQ and the ^IXIC tend to cross each other a lot in the last couple of years, although they diverged 5 years ago and never crossed.

I was wondering if there was a way to play the divergence?

This is simply a small-caps vs. large-caps effect.

QQQQ does not track ^IXIC, so divergence is to be expected; ^IXIC is a cap-weighted composite of all the NASDAQ stocks, while QQQQ tracks the NASDAQ 100 Index, which is a cap-weighted composite of 100 of the largest non-financial NASDAQ stocks. (On Yahoo! Finance, the NASDAQ 100 Index is ^NDX. You'll see that the divergence between the Qubes and ^NDX is very, very small, so no significant arbitrage profits on that pair, anyway.)

Since both indices are cap-weighted, the NASDAQ 100 accounts for a very large portion of the NASDAQ Composite. That's why they move together. ^IXIC, however, contains a bunch of smaller stocks that ^NDX doesn't have, so ^IXIC outperforms ^NDX when the smaller companies in the Nas rally (and vice versa), hence the divergence that you see. In 1999 and 2000, large-caps were outperforming the small caps, so QQQQ (^NDX) did better than ^IXIC. That divergence five years ago corresponds roughly to when the current small-cap outperformance began.

Compare SPY to IWM. You'll notice that the small caps start outperforming the S&P 500 about the same time ^IXIC began outperforming QQQQ (towards the end of 2001.)

 

[MustPlayOptions]

Quote from codehappy:

This is simply a small-caps vs. large-caps effect.

QQQQ does not track ^IXIC, so divergence is to be expected; ^IXIC is a cap-weighted composite of all the NASDAQ stocks, while QQQQ tracks the NASDAQ 100 Index, which is a cap-weighted composite of 100 of the largest non-financial NASDAQ stocks. (On Yahoo! Finance, the NASDAQ 100 Index is ^NDX. You'll see that the divergence between the Qubes and ^NDX is very, very small, so no significant arbitrage profits on that pair, anyway.)

Since both indices are cap-weighted, the NASDAQ 100 accounts for a very large portion of the NASDAQ Composite. That's why they move together. ^IXIC, however, contains a bunch of smaller stocks that ^NDX doesn't have, so ^IXIC outperforms ^NDX when the smaller companies in the Nas rally (and vice versa), hence the divergence that you see. In 1999 and 2000, large-caps were outperforming the small caps, so QQQQ (^NDX) did better than ^IXIC. That divergence five years ago corresponds roughly to when the current small-cap outperformance began.

Compare SPY to IWM. You'll notice that the small caps start outperforming the S&P 500 about the same time ^IXIC began outperforming QQQQ (towards the end of 2001.)

Thank you very much for that explanation - now it makes more sense because I was wondering why the divergence still existed when it's so blatantly waiting for someone to use it. So there's still a significant risk of another divergence then at some point and so it's not worth playing then probably.

 

[zxcv1fu]

Quote from MustPlayOptions:

Thanks - I didn't know that existed. An article about PSQ also mentions SH which is short the S&P 500 as well.

I'm curious why you suggested in an IRA though? Do you mean just for trading purposes to avoid the short term gain/loss or is there another reason?

Is PSQ shortable too? Do you know if it's short the entire Nasdaq or short the Nasda 100?

Thanks again.

Some IRA accounts do not allow options & shorting stocks, therefore in down market the only reasonable holdings are bear funds & the new bear ETF's.