Affectionately known as the "Q's" or "Cubes" due to its unusual ticker symbol (which consists of three "Q's"), the Nasdaq-100 Trust QQQ ($36.57) is probably the best-known exchange-traded fund (ETF) in existence. QQQ has been around since March 1999 and is now the most heavily traded issue in the United States, with an average daily volume near 78 million shares. However, that figure is down substantially from more than 88 million in 2002. In addition, the monetary value of shares traded is down even more when you consider that QQQ once traded as high as $120.50!

QQQ tracks the Nasdaq-100 Trust Index, which consists of 100 of the largest companies traded on the Nasdaq stock exchange. The largest holding in the fund is Microsoft Corp. (MSFT, $26.53), which accounted for more than 8% of the fund's value as of February 26, 2004. The fund's ten largest holdings accounted for more than 40% of QQQ's value at that time. 

Because QQQ's value is based on the Nasdaq market, which is technology heavy, the fund trades very much like a portfolio of tech issues. However, in late 2002 the Nasdaq altered some of the members of the trust, making it less reliant on technology issues. Even so, QQQ remains strongly correlated with the technology sector.

Each December the Nasdaq goes through an annual review of the index and often makes substantial changes to its components. Last year the Nasdaq made only eight changes, but in 2002 it made 17! The Nasdaq also makes changes to its Nasdaq-100 Index throughout the year as required due to delistings, bankruptcies, mergers and acquisitions. Last year's changes did little to alter the index's main focus. The Nasdaq-100 remains heavily based on the technology sector, as nearly 2/3 of its component stocks are involved in either technology or telecom.

QQQ is still one of the most volatile ETFs in existence. However, its volatility has declined somewhat in recent years. For example, the fund's average daily price range is more than 2% below where it was in 2002.

This ETF is so liquid that, if you use a direct access broker and trade through the ECNs (Electronic Communications Networks), it is not at all uncommon for the fund to have a higher bid price on one ECN than its offer price on another. This is known as a "crossed market." The S&P 500 SPDR (SPY, $115.02) also trades crossed on a regular basis.

QQQ is fairly volatile. It is a favorite of daytraders, both because of its excellent liquidity as well as its fairly wide daily trading range. While it may pale in comparison to individual stocks, its average daily range of 2.3% in 2003 and its deep market means that daytraders can easily enter and exit trades with minimal slippage.

The ETF Authority seeks steady weekly returns for its readers. We do not make day trading recommendations. However, that certainly doesn't mean we can't make money in this fund. As you can see from the chart below, QQQ has certainly trended well over the years and the fund gained nearly +50% in 2003.

QQQ is far more volatile than its more staid cousins -- the Dow Diamonds (DIA, $106.07) and the S&P 500 SPDRs. It makes an excellent choice if you're looking to raise the risk profile of your portfolio.

HOW TO MAKE MONEY IN QQQ THIS YEAR
Usually when people make forecasts, they generally have an easier time predicting nearby as opposed to more distant time periods. While that might be true when it comes to analyzing such items as economic data and corporate earnings, predicting price movements is not always that straightforward. The current QQQ chart suggests that the fund could actually rally to $40.56 in the very short term, if the fund rallies immediately. However, the way QQQ has traded recently, it is more likely that the fund will first slip to at least $35.23, if not about $33.04, before starting another bull run.

The $40.56 price target I mentioned above represents the 1.618 Fibonacci extension of the first rally off the October 2002 low projected from the retest in February 2003. Despite the enormous gains, this means that prices have still not reached the preferred minimum 1.618 extension for a third wave (based on Elliott Wave Theory). That should be troubling to bullish investors.

Some analysts prefer to use an extension calculation using points rather than percentages. That would have offered a $37.93 price target. But, on a percentage basis, that is no place near 62% more than the first leg off the 2002 nadir. For that reason, I prefer percentage-based calculations for longer-term periods in the stock market.

Ultimately, this fund has the potential to rally into the $45 range this year. After that, however, I expect a sharp fall, with potential for a 25-40% drop in the fund starting later this year.

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