Bet on Drops in ‘Stretched’ Nasdaq, Credit ETFs, BTIG Says

(Bloomberg) -- Technology stocks and investment-grade corporate bonds look particularly extended and investors can position via options for potential reversals in both asset classes, according to Btig LLC.

“The tech stock/Nasdaq centered rally appears stretched as the Nasdaq VIX made a new yearly low in December, diverging from the S&P 500 VIX,” which didn’t breach lows from April and November, Btig strategist Julian Emanuel wrote in a note Jan. 1. The Cboe NDX Volatility Index reached its lowest closing level since January 2018 last month.

Bet on Drops in ‘Stretched’ Nasdaq, Credit ETFs, BTIG Says

Emanuel recommends a bearish trade on the tech-heavy Nasdaq involving buying February $203 puts on the Invesco QQQ Trust Series 1 exchange-traded fund based on the Dec. 31 closing price of $212.61.

Nasdaq stocks just capped a decade in which their combined value rose by more than $7 trillion, ending with a 38% gain in 2019, the best rally in 10 years. That exceeded the S&P 500 Index’s gain of 29%, the 22% advance for the Dow Jones Industrial Average and the 24% increase in MSCI’s all-country world index.

Another asset class poised for a potential turn is investment-grade credit, Emanuel said. Corporates might issue debt early in the year, ahead of presidential-election uncertainties later on. Also, long-dated yields “appear prone to upside pressure” and the Federal Reserve is unlikely to cut rates further, he noted.

The cost of protection in the investment-grade market has made new all-time lows while that hasn’t been the case in high yield, Emanuel said.

He recommends buying February $127 put options on the iShares iBoxx $ Investment Grade Corporate Bond ETF to position for an inflection.

Read how corporate bonds as a cash cow will be hard to replicate in 2020.

©2020 Bloomberg L.P.

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