As the Nasdaq 100 index sinks, is it time to buy SQQQ ETF?

The Nasdaq 100 index suffered a harsh reversal on Wednesday as the market reacted to the mixed earnings by Tesla and Alphabet. It slipped by more than 505 points, its worst single-day drop since 2022. 

It has crashed by over 8% from its highest point this year, meaning that it could soon enter a technical correction phase. According to TradingView, the fund has dropped to the lowest point since June 11th. 

Tesla and Google earnings

The Nasdaq 100 index collapsed after Tesla and Alphabet reported mixed financial results. As we reported, Tesla said that its margins and sales dropped in the second quarter as competition in the industry rose. It also decided to delay its much-awaited robotaxi product, which it believes will push its valuation to over $5 trillion.

Tesla is facing major challenges. Competition in the US and China has risen with companies like BYD, Rivian, Nio, and Xpeng gaining market share. It has been forced to cut prices to stay competitive. It is also working on a cheaper vehicle that will be ready as soon as in 2025. 

At the same time, more customers are considering hybrid vehicles that combine internal combustion engine (ICE) with electric.

Meanwhile, Alphabet’s stock price plunged by over 5% even after it reported strong financial results and launched a $70 billion share buyback plan. Most of its businesses like YouTube, Google search, and Cloud continued doing well. Therefore, the stock dropped because investors anticipated that its business would start slowing down. 

Still, I believe that Alphabet is one of the best companies in Wall Street. It has a monopoly in search, a leading market share in artificial intelligence, owns YouTube, and has a stable market share in cloud computing. While it has a market cap of over $2.1 trillion, its valuation multiples seem reasonable since it has a forward P/E ratio of 22, which is in line with the S&P 500 index.

Amazon, Meta, Microsoft, Apple earnings ahead

Next week will be important for the Nasdaq 100 index as its biggest constituent companies are set to publish their results. 

Microsoft, the biggest company in the world, will release its results on Tuesday. Analysts expect its numbers to show that its revenue rose to $64.4 billion in the second quarter from $61.8 billion in Q1. Its profit per share is expected to remain intact at $2.93. Microsoft has a good record of beating analysts’ estimates. 

Meta Platforms, will release its numbers on Wednesday while Apple and Amazon will release their numbers on Thursday. These results are expected to show that growth continued in Q2 as they did in the last quarter. 

The other key driver for the Nasdaq 100 index next week will be the Federal Reserve, which will deliver its rates decision on Wednesday. Signs that the Fed will start cutting rates in September will be a positive thing for tech stocks.

Outlook for the ProShares UltraPro Short QQQ ETF (SQQQ)

SQQQ ETF vs Nasdaq 100 index

The ProShares UltraPro Short QQQ ETF had its best day since 2022 on Wednesday as it jumped by almost 11%.

This rebound was expected since the ETF is created to do well when the Nasdaq 100 index is falling. It rises 3x if the Nasdaq 100 index falls by 1% and vice versa.

As a result, the ETF has crashed by almost 50% in the last 12 months as the Nasdaq 100 index has risen by 23% in that period. The ProShares UltraPro QQQ (TQQQ), which is the exact opposite of the SQQQ ETF has risen by over 52% in that period.

Therefore, investors may be tempted to invest in the SQQQ fund since the Nasdaq index has dropped and moved below the 50-day moving average. 

These traders have a point since some of the biggest companies in the index are severely overvalued. Tesla is one of them. It trades at a forward P/E ratio of 111.6 and a trailing P/E multiple of 60.7 even though it is no longer growing as it used to in the past. 

Nvidia is another highly overvalued company as it trades at a forward P/E multiple of 43 and a trailing one of 66. As we saw with companies like Tesla and Celsius Holdings, highly overvalued stocks retreat when their growth slows. Tesla is down by over 40% from its all-time high while Celsius has fallen by 54% from its YTD high. 

However, there is a risk for investing in the SQQQ ETF. First, the Nasdaq 100 index always bounces back after falling. Earlier this year, it dropped by 8% between March and April and then bounced back to a record high. 

The same situation happened in March 2020 as the pandemic started, during the dot com bubble, and during the Global Financial Crisis (GFC) in 2008/9. This explains why the SQQQ ETF has dropped by over 99% over time. Therefore, while the fund is tempting, it carries major risks.