After the worst day for stocks in over two months on Tuesday, the market came roaring back Wednesday. It’s no secret that investors’ bullishness is overextended, and we all know the ride’s going to end sometime. But, for now, it’s still a trade-worthy ride.

Let’s look at the SPDR S&P 500 Fund (NYSE: SPY), the ETF that tracks the S&P 500 Index, and the PowerShares QQQ Trust (NASDAQ: QQQQ), which tracks the Nasdaq 100 Index.

You’re probably aware that the market’s different indices — and different ETFs — tend to move in tandem with the market’s larger trend. What some don’t know, however, is that the Nasdaq tends to lead the way with stronger moves, both up and down.

The practical application of such a theme is two-fold. First, spotting this relative strength of the QQQQs over the SPDRs (or QQQQs under the SPDRs, in bearish cases) can identify new trends as they emerge. Second, and perhaps better, by waiting for the Nasdaq’s relative leadership, you can distinguish the real emerging trends from the fake-outs.

A couple of examples will really nail down this premise.

On the chart below, we’ve plotted the percentage change of QQQQ versus the percentage change of SPY since Aug. 31, when the market made a sharp and unexpected reversal. At the bottom is the S&P 500, i.e., most of the market. See the clear and widening divergence between the SPDRs and the QQQQs? It was the biggest disparity we’d seen in months, at the same we saw biggest and prolonged gain for the market that’s we’d seen in months.

QQQQ Relative Strength Over SPY

Here’s another example: the big rally from Feb. 5 through April 23. That 15% gain was marked by a clear bullish divergence between QQQQ and SPY starting on March 1 (and really before then).

QQQQ Relative Strength Over SPY

How about a bearish example (yes, it works that way too)? Remember the market’s implosion in late September 2008? We actually got an early warning at the beginning of the month. Several days before the market even started to sell off in a big way, the QQQQs started to slide lower at a notably faster pace than the SPDRs did.

QQQQ Relative Strength Over SPY

You get the idea. Though not every single one of the market’s major turns are marked this distinctly, the vast majority of them are. In any case, this is just one of the many ways to use ETFs beyond just owning them.

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