Is Recent Investor Activity In SQQQ Signaling A Changing Market?

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This is simply a travel up to our October 11th article: SQQQ Metrics Still Indicate A Bear Market Bottom. In that article we said investor activity successful nan money pointed to nan commencement of a bull market and recommended trading SQQQ. At nan clip it was priced astatine $63.20. It is presently astatine $38.89, down 40%.

Investor activity successful SQQQ since December seems to now bespeak nan opposite. Historically, this activity backmost successful is often normal aft a beardown bargain signal, but astatine different times it tin awesome a short word marketplace decline. We thin to judge this backmost and distant activity by investors successful SQQQ is signaling a constrictive trading scope market.

We truthful deliberation that short word traders tin usage SQQQ if they judge nan marketplace is overbought and astir to acquisition a short term decline. Long-term investors should astir apt still debar this short-term instrument.

Using ProShares investor activity arsenic marketplace indicators

We usage investor activity successful leveraged and inverse ProShare ETFs much arsenic indicators for nan market, arsenic opposed to which money is nan champion conveyance to profit from those indications. We presume that investor activity successful nan ETF is often typical of what investors are reasoning everywhere, truthful nan activity itself becomes a bully parameter for nan wide market.

So, if investor activity successful a peculiar ETF points to higher (or lower) banal prices, it doesn't needfully mean we deliberation that ETF is nan champion conveyance to return advantage of nan indicated move. That determination depends much connected nan clip sky and consequence tolerance of nan investor. We effort to separate this.

Warning

There are ample risks utilizing SQQQ to effort to profit from marketplace moves. The consequence of nonaccomplishment grows nan longer 1 holds nan fund. The pursuing informing astir utilizing highly leveraged ETFs is provided by ProShares.

ProShares UltraPro Short QQQ (NASDAQ:SQQQ) seeks a return that is -3x nan return of its index(target)for a azygous day, arsenic measured from 1 NAV calculation to nan next. Due to nan compounding of regular returns, holding periods of greater than 1 time tin consequence successful returns that are importantly different than nan target return and ProShares' returns complete periods different than 1 time will apt disagree successful magnitude and perchance guidance from nan target return for nan aforesaid period. These effects whitethorn beryllium much pronounced successful costs pinch larger aliases inverse multiples and successful costs pinch volatile benchmarks. Investors should show their holdings arsenic often arsenic daily. Investors should consult nan prospectus for further specifications connected nan calculation of nan returns and nan risks associated pinch investing successful this product.

The return of nan Fund for periods longer than a azygous time will beryllium nan consequence of its return for each time compounded complete nan period. The Fund's returns for periods longer than a azygous time will very apt disagree successful amount, and perchance moreover direction, from nan Fund's stated aggregate (3x) times nan return of nan Index for nan aforesaid period. For periods longer than a azygous day, nan Fund will suffer money if nan Index's capacity is flat, and it is imaginable that nan Fund will suffer money moreover if nan level of nan Index rises.

Longer holding periods, higher Index volatility, and greater leveraged vulnerability each exacerbate nan effect of compounding connected an investor's returns. During periods of higher Index volatility, nan volatility of nan Index whitethorn impact nan Fund's return arsenic overmuch arsenic aliases much than nan return of nan Index.

The Fund presents different risks than different types of funds. The Fund uses leverage and is riskier than likewise chair marked costs that do not usage leverage. The Fund whitethorn not beryllium suitable for each investors and should beryllium utilized only by knowledgeable investors who understand nan consequences of seeking regular leveraged (3x) finance results of nan Index, including nan effect of compounding connected Fund performance. Investors successful nan Fund should actively negociate and show their investments, arsenic often arsenic daily. An investor successful nan Fund could perchance suffer nan afloat worth of their finance wrong a azygous day.

One should besides publication this elaborate connection from nan SEC connected nan risks inherent successful leveraged ETFs: Message from SEC connected leveraged ETFs.

SQQQ NAV

SQQQ is simply a highly leveraged, volatile fund. It's an inverse scale money meaning nan value should spell up erstwhile nan marketplace declines. Its NAV since inception is shown below. As 1 would expect, it did very poorly during nan long, secular bull marketplace falling from an adjusted value of $500,000 per stock to $38.

SQQQ NAV since 2010 (Michael McDonald)

As nan yellowish value tag indicates, nan money started 2022 astatine a value of $28.81. During nan carnivore marketplace it reached a precocious of $66.30 by precocious May. This was a summation of 130%. It double topped successful October and has since declined to $38.89 arsenic of 2/22/23. While these moves look mini connected nan floor plan they are important value changes that dramatically item nan opportunities and volatility successful nan fund.

(In this article, we crippled nan money metrics against nan underlying QQQ value scale and not SQQQ. This makes it easier to spot immoderate correlations of investor activity pinch nan banal market. It's excessively difficult to spot these utilizing SQQQ because nan utmost value diminution washes retired immoderate ocular correlation).

SQQQ Shares Outstanding

The accordant value diminution successful SQQQ has forced ProShares to regularly do reverse banal splits to assistance nan NAV backmost up to acceptable value levels. This is why we only show nan SO chart from 2018 to present. This shrinkage successful nan adjusted number of shares makes it difficult to glean immoderate important conclusion from semipermanent trends successful shares outstanding for periods of clip longer than this.

Shares outstanding of SQQQ (Michael McDonald)

The floor plan of shares outstanding does bespeak that investors successful SQQQ arsenic a group, look to person shown alternatively bully marketplace timing. Peaks successful nan number of shares outstanding look to hap astatine awesome marketplace tops, wherever you would want it to occur. The number of shares outstanding besides seems to shrink astatine marketplace lows (price highs of SQQQ) arsenic 1 would hope.

The existent number of 142,451 shares, is conscionable somewhat beneath nan caller highs of a fewer days ago. It's excessively early to show if this is simply a informing motion for nan marketplace aliases is somewhat normal.

Total Assets Under Management - SQQQ

SQQQ is nan 3rd largest money successful nan ProShares ETF family and, pinch $5.5 cardinal successful assets, it accounts for 8.5% of nan total. The truth that full assets roseate since November during nan marketplace beforehand and value diminution successful SQQQ, is owed to nan ample number of traders who bought nan money into nan rally.

Chart of Total Assets successful SQQQ since inception (Michael McDonald)

Buying levels successful SQQQ

We person different measurement of measuring investor activity and that's by measuring nan dollar magnitude of regular buying of SQQQ arsenic a percent of full assets. It's presently 106%. A debased percent is 20%. The highest number, which occurred past year, is 280%. These are rather utmost swings successful buying activity

The achromatic arrows show that precocious buying levels successful SQQQ look to hap astatine marketplace value lows. The existent ratio is still a precocious ratio and should connote further value gains. However, we judge nan adjacent chart, which shows full rate travel successful and retired of nan fund, is much insightful astatine this time.

Average regular buying successful SQQQ arsenic a percent of full assets (Michael McDonald)

SQQQ rate flow

While buying levels successful SQQQ proceed to beryllium high, trading levels person declined rather a lot. So overmuch truthful that nan nett rate travel into nan money is now very positive. It was nan grounds antagonistic rate travel successful SQQQ past October (see past achromatic arrow) that prompted nan bargain awesome connected nan marketplace and nan waste awesome successful SQQQ.

If 1 studies nan graph, a ample surge backmost into nan money aft a ample surge retired is common, truthful we are not judge if it's signaling a reversal successful inclination aliases not. Our emotion is that this ample backmost and distant travel of money into SQQQ is signaling beardown hostility successful investor sentiment astir nan marketplace and whitethorn bespeak nan continuance of a constrictive trading range. This conclusion is reinforced by comparatively mini value changes successful nan look of these ample finance swings.

Average forty time rate travel per time successful SQQQ. (Michael McDonald)

Takeaway

We deliberation this accelerated backmost and distant plaything of investors into and retired of SQQQ is signaling a constrictive trading scope market. If we are right, traders tin usage SQQQ to effort to profit from short word downward marketplace swings erstwhile nan marketplace becomes overbought. But trading positions should only beryllium constricted to days successful nan market.

Michael James McDonald is simply a banal marketplace forecaster, writer and erstwhile Senior Vice President of Investments astatine what is now Morgan Stanley. He is simply a semipermanent advocator of nan mentation of contrary sentiment and nan measurement of investor sentiment erstwhile forecasting value direction.His first book, " A Strategic Guide to nan Coming Roller Coaster Market" was published successful June of 2000, 3 months earlier nan apical of nan dot comm market. On its screen was written, "How a caller exemplary of nan banal marketplace predicts nan extremity of nan 18-year bull marketplace (1982-2000) and nan opening of a caller era." The "new era" was to beryllium a semipermanent (roller coaster) trading scope market, which did materialize betwixt 2000 and 2009.Then, connected August 31st, 2010, successful a SA article titled: "The 10 Year Trading Range Is Over - The 'Final Stampede' Has Begun", he called an extremity to this trading scope marketplace and nan opening of different semipermanent bull market, which besides came about. Through his institution nan Sentiment King, he continues to study and do what he loves - investigation and effort to successfully forecast awesome banal trends - and thief others spot them too.