Time To Hedge Red-Hot Tech Stocks? (QQQ)

From David Dutkewych: With the 10-year Treasury yield still hovering below 2.4%, money continues to pour into equities, aligning perfectly with my bullish long-term view on the stock market.

Here at the Edelson Institute we have been warning for years that as the global sovereign debt crisis begins to play itself out, it will send a tidal wave of capital into U.S equities — driving the Dow to at least 31,000, but potentially even higher.

Even Nobel Prize-winning economist Robert Shiller agrees.

Last week, Shiller went on record saying that he believes investors should continue to own stocks because the bull market may continue for years — and could go up 50% from here.

Overall, companies in the S&P 500 are on pace to see 14% earnings growth for the first quarter of 2017, the most since the third quarter of 2011. That marks the third straight quarter of earnings growth for the S&P 500.

Bullish sign? You bet: Earnings growth has historically been the biggest contributor to share-price appreciation, and it has proven itself to be one of the best predictors for U.S. stocks.

That’s why I’m not one bit surprised that we are starting to see huge sums of money flowing into U.S. stocks, especially into the hottest part of the stock market: Technology.

In fact, no area of the stock market has been hotter than tech. Since the election, it has surged by 21%. And it’s clear to me that investors still have a strong appetite for more, with no signs of slowing down.

In one day last week, investors poured a whopping $1.8 billion into the largest exchange-traded fund tracking the sector (PowerShares QQQ Trust Series 1 ETF, symbol QQQ), making it the biggest single-day inflow since September 2010.

That’s right: $1.8 billion in a single day. Massive!

And recent data compiled by Bank of America Merrill Lynch shows that the group is on pace to absorb the most capital since the dot-com bubble 15 years ago.

One reason the large-cap tech sector attracts a surge in new money flows is that the sector has the best profit growth in the S&P 500 — excluding energy — and it’s projected to see earnings expand by 19% for the full-year 2017. That’s more than double the broader benchmark’s expected ex-energy growth of just 9.2%, according to data compiled by Bloomberg.

Now, just because tech stocks have caught fire doesn’t mean you should be throwing all caution to the winds. Stocks are long overdue for a meaningful pullback of 10% or more. This type of pullback would be healthy for the overall market, but you should also protect yourself when the time comes.

So, while my long-term outlook for stocks — and the tech sector — remains positive, it’s time to defend against a downdraft.

Right now on my radar are the out-of-the-money put options on the PowerShares QQQ Trust Series 1 ETF (QQQ) for the tech sector and put options on the SPDR S&P 500 ETF Trust (SPY) for the broader market.

The PowerShares QQQ ETF (NASDAQ:QQQ) rose $0.52 (+0.37%) in premarket trading Friday. Year-to-date, QQQ has gained 19.72%, versus a 8.87% rise in the benchmark S&P 500 index during the same period.

QQQ currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 34 ETFs in the Large Cap Growth ETFs category.

This article is brought to you courtesy of Money And Markets.