In a mid-November 2024 Seeking Alpha article on Turbocharging tech stocks with the ProShares Ultra QQQ ETF (NYSEARCA:QLD) ETF, I wrote:

Leverage is a hedonistic approach to trading or investing, as the risk-reward profile results in overwhelming pleasure or incredible pain. Leveraged derivative market tools use options and swaps to create the gearing, which comes at a price, time decay. If the price of an underlying asset moves contrary to expectations, the losses can quickly mount. Stable markets also lead to pain as leverage suffers from static price action. Meanwhile, the profits are magnified when the underlying asset performs according to expectations.

Technology stocks and the NASDAQ-100 (NDX) composite are more volatile than the diversified S&P 500 (SP500) and Dow Jones Industrial Average (DJI).

I concluded:

Leverage exchanges more potential risk for greater potential rewards. QLD can be a valuable tool for market timing in the technology sector, but time and price stops and careful attention to risk-reward dynamics are necessary for success.

On November 13, the Nasdaq Composite (COMP:IND) was at 14,075.76, with the Invesco QQQ Trust ETF (QQQ) at the $385.04 per share level. QLD was at $67.60 per share. On June 21, the Composite, QQQ, and QLD were appreciably higher.

New highs in the Nasdaq Composite

The Nasdaq Composite Index has been a bullish beast, reaching new highs in June 2024.

The monthly chart highlights the ascent of the tech-heavy Nasdaq, which rose to a record 17,936.79 high in June 2024. In 2023, the Nasdaq Composite posted a 43.42% gain and was 9.11% higher in Q1 2024, closing the first quarter at 16,379.46. The Nasdaq was again higher as the end of Q2 2024 approaches.

Investors continue to flock to technology stocks as chip producers and AI companies’ earnings have been nothing short of incredible.

Leading the leading U.S. stock market indices in Q2

The leading U.S. stock market indices are the Nasdaq, S&P 500, DJIA, and Russell 2000 (RTY).

In 2023, the leading indices posted the following returns:

• The NASDAQ moved 43.42% higher.
• The S&P 500 was up 24.23%.
• The DJIA gained 13.70%.
• The Russell 2000 posted a 15.11% increase.

In Q1 2024, the results were as follows:

• The Nasdaq moved 9.11% higher.
• The S&P 500 was up 10.16%.
• The DJIA gained 5.62%.
• The Russell 2000 posted a 4.78% increase.

While the Russell 2000 and DJIA are lower than the Q1 2020 close on June 21, 2024, the S&P 500 and Nasdaq were higher, with the tech-heavy Nasdaq leading the way on the upside.

The chart highlights that all the companies with over $1 trillion market caps trade on the tech-heavy Nasdaq.

The Bullish Case-Momentum and Innovation

Sir Isaac Newton’s first law of motion, or the Law of Inertia, states, “A bond in motion stays in motion.” In markets, the statement that “the trend is your friend” is another way of stating Newton’s law of physics. The bottom line is that momentum favors technology stocks and the Nasdaq Composite, as its bullish trend has been firmly intact for decades.

Innovation is critical for success. Microsoft, Nvidia, Apple, Alphabet, Amazon, and Meta Platforms are global innovation leaders, justifying their share prices and market caps over the past years. Momentum and Innovation are crucial factors for success and rising share prices.

The Bearish Case-Value and External Factors

The S&P 500 may be second to the NASDAQ in performance, but is the most diversified stock market index. According to the SPY ETF, the average price-to-earnings ratio in the S&P 500 is around the 17.86 level. The NASDAQ’s QQQ ETF has a higher average 22.70 P/E ratio. On June 21, the leading technology companies' P/E ratios in the trillion-dollar-plus club were:

• MSFT: 37.67
• NVDA: 48.28
• AAPL: 31.81
• GOOG: 23.58
• AMZN: 41.01
• META: 25.00

The higher P/E ratios signal the market expects earnings to keep growing to justify the current share prices. Any disappointments could lead to significant price corrections.

Aside from the lofty valuations, external factors can cause significant corrections in stocks with the highest earnings expectations. Renewed inflationary pressures, leading to higher interest rates, could weigh on stocks. Moreover, a highly volatile geopolitical and U.S. domestic political landscapes could cause sudden shocks to the stock market, as we witnessed during the 2008 global financial crisis, the 2020 worldwide pandemic, and the 2022 Russian invasion of Ukraine that caused sudden downdrafts in markets across all asset class, and technology stocks were no exception. Meanwhile, the tech wreck in the late 1990s caused technology stocks to plunge. The higher tech stock P/E values rise, the odds of a severe correction increase.

QLD is a short-term trading product-Timing is critical

The ProShares Ultra QQQ ETF performs like the QQQ on steroids. QLD’s fund profile states:

QLD’s top holdings include:

As the chart illustrates, QLD owns a leveraged portfolio of stocks in the Nasdaq’s trillion-dollar club.

The Nasdaq rose 43.42% in 2023 and was 9.11% higher in Q1 2023, closing the quarter at 16,379.46. At 17,768.08 on June 21, the Nasdaq Composite was 8.50% higher in late Q2.

The monthly chart highlights QLD’s 116.9% rise in 2023, 15.1% rally in Q1 2024, and 15.50% increase so far in Q2. QLD is a highly liquid trading tool with over seven billion in assets under management. QLD trades an average of over two million shares daily and charges a 0.95% management fee.

QLD has done an excellent job turbocharging the QQQ and Nasdaq Composite’s performance, but it comes with commensurate risks. Any correction or sideways trading in the leading technology index will cause the QLD to decline, as the potential for magnified rewards comes with the risk of oversized losses. Drift decay can cause losses even if the underlying index rises over time. Please read the SEC bulletin on leveraged ETF risks before placing any traded.

As I wrote in November 2024,

“Technology stocks and the NASDAQ-100 (NDX) composite are more volatile than the diversified S&P 500 (SP500) and Dow Jones Industrial Average (DJI).”

QLD will continue outperforming if the tech sector’s earnings justify the lofty P/E ratios. However, if high valuations catch up with the sector, the leading companies post disappointing earnings, or there is an external shock to the stock market, watch out below. Leveraged products like QLD require careful attention to risk-reward dynamics, including time and price stops, as leverage’s ultimate price is time decay.