Direxion's QQQU, QQQD ETFs Foster A Diversified Approach To Magnificent 7 Speculation

Underneath the glitz of artificial intelligence, cloud computing and advanced mobility is an elite group of publicly traded innovators known as the Magnificent Seven. Earlier this summer, these powerhouse enterprises combined represented a record-breaking $19.4 trillion in market capitalization. Since then, the benchmark S&P 500 has gained roughly 7%, demonstrating what seems to be an unstoppable force of nature.

Fundamentally, what continues to spark upward mobility in the Mag 7 stocks is the implied technological paradigm shift. Sector giants like Nvidia (NASDAQ:NVDA) and Microsoft (NASDAQ:MSFT) are actively reshaping the future of digital innovation and accelerated productivity through generative-AI-focused systems and platforms. Furthermore, Tesla (NASDAQ:TSLA) has almost singlehandedly altered the concept of next-generation mobility.

Of course, the other element that fuels the wild valuation of Mag 7 stocks is the sustained performance. Despite an already-impressive performance, NVDA stock remains a power hitter, gaining nearly 41% year-to-date. On the other end, MSFT has shed its boring legacy tech label, moving up almost 25% since the beginning of the year, and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) recently made headlines for giving a solid lift to legendary investor Bill Ackman's portfolio.

Still, not everything regarding the Magnificent Seven is rosy. Because of the elite group's resounding success, many investors are worried about the S&P 500's capital concentration. In September, the seven names combined for a market cap of nearly $21 trillion, inking a new record. To provide some context, Nvidia's valuation has ballooned to over six times the size of Eli Lilly (NYSE:LLY), the largest publicly traded U.S. healthcare firm.

What's perhaps most worrying is that the exceedance ratio of the tech sector's valuation relative to healthcare has reached levels last seen in March 2000 — the very peak of the dot-com bubble.

To be sure, the similarities to the crisis, such as concentration of gains and sky-high valuations, raise alarm. At the same time, the main difference appears to be underlying substance. During the dot-com mania, many companies had no earnings nor even revenue. That's a far cry from today, where AI is very much displacing people from their jobs.

The Direxion ETFs: Still, with the Mag 7 tickers showing little apparent signs of a material slowdown, the debate rages. As it turns out, the countervailing viewpoints have allowed financial services provider Direxion to deliver a pair of relevant trading products.

For the optimists, the Direxion Daily Magnificent 7 Bull 2X Shares (NYSE:QQQU) tracks 200% of the performance of the Indxx Magnificent 7 Index. On the other end, pessimists may consider the Direxion Daily Magnificent 7 Bear 1X Shares (NYSE:QQQD), which tracks 100% of the inverse performance of the aforementioned index.

Primarily, Direxion ETFs offer a convenient mechanism for speculation. As debit-based transactions, traders only have to worry about losing the money they put into the fund. Furthermore, the structure of these ETFs operates very much like any other publicly traded security. This intuitive approach should mitigate the learning curve, thus simultaneously enhancing user accessibility.

Still, prospective participants must be aware of the unique risks of Direxion ETFs. First, leveraged and inverse funds tend to be more volatile than traditional funds tracking benchmark indexes like the Nasdaq Composite. Second, these specialized vehicles are designed for exposure lasting no longer than one day. Going beyond this recommended period may expose ETF unitholders to positional decay due to the daily compounding effect.

The QQQU ETF: After coming off a rocky start to the year, the QQQU ETF found its form, gaining 28% since the January opener.

Currently, technical momentum is robust in the bull fund, with the price action firmly above the 50- and 200-day moving averages.
One warning sign to note is volume. Since the spring season this year, accumulative interest has faded, which means that volume is not confirming price.

The QQQD ETF: While the QQQD ETF demonstrated early promise for inverse speculators, the fund eventually tumbled to a 20% year-to-date loss.

With the 20-day exponential moving average imposing near-term resistance, the QQQD ETF has struggled for traction.
Although volume has faded in the last several weeks, accumulation spiked in August. That might signal that more traders are catching wind of the excessive speculation in Mag 7 stocks and may seek to bet against the euphoria.