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We are in a bubble.
That doesn’t mean it will pop tomorrow, next month, or even next year. But it does mean that it’s time to get prepared.
That’s why I created what I’m calling my “Bubble ETF Focus List.” It contains the popular stock averages like the SPDR S&P 500 ETF (SPY), Invesco QQQ Trust (QQQ) and Dow Industrials SPDR (DIA), but mainly for comparison purposes. The real stars of this new watchlist are ETFs that represent richly valued groups of stocks. Semiconductors, memory stocks, space stocks, and of course the Magnificent Seven.
There’s a lot to say about each of these, but I want to zero in on the Wisdomtree Quantum Computing Fund (WQTM). It is a more-than-$300-million ETF that, as you can see, has the highest price-earnings ratio on the list, at nearly 82x earnings.
Quantum computing holds tremendous long-term technological promise, but at a multiple like that, investors are paying for years of flawless commercial growth today.
While the fund holds cash-flowing tech giants like International Business Machines (IBM) and Alphabet (GOOG) (GOOGL) to stabilize the balance sheet, its pure-play quantum names carry high cash burn rates and speculative valuations. When macro liquidity tightens, funds carrying 80x multiples are usually the first to experience steep valuation resets.
In other words, the reasonably valued quality names are the last to be sold off in a crisis.
Over the past couple of years, while doing my usual stock screening work, I would tend to find a set of quantum computing stocks that had excellent near-term upside. Names like D-Wave Quantum (QBTS), IonQ (IONQ), Rigetti Computing (RGTI), and Quantum Computing (QUBT). They tend to move up and down in sync, and even move in sympathy with each other when one of them announces quarterly earnings.
As with my broader theme that nearly all stocks and industries related to tech and AI are now highly correlated, and likely to stay that way, I got tired of trading three or four of those stocks at a time. After all, that’s what ETFs are about to me: a convenient and efficient way to buy baskets of similar stocks in a single trade. For swing trading, this is ideal.
WQTM does not have a long trading history, but its underlying stocks do. The chart above looks more like a potential reversal of the last quick up move, which took this ETF up 20% in just a couple of weeks. That’s par for the course with this set of stocks, which is why another list I keep is one with the ETFs that allow me to bet against those four largest WQTM positions.
The takeaway for me on WQTM and my new “Bubble ETF” list is that there is going to come a time when the first question traders will ask themselves in the morning is “how can I make sense of the chaos that just ensued?” So I’m prepping by grouping, but separating, the many distinct sub-segments of the mighty AI trade. For continued swing trading on the upside, but especially as a watchlist to bet against when this remarkable era of high expectations finally ends.
Rob Isbitts is a semi-retired CIO, former fiduciary investment advisor, and Barchart columnist. Check out his other work at ETFYourself.com (featuring the Fresh Charts weekly trading post), and ROAR.PiTrade.com, helping investors to better-manage their own portfolios.
