TERADAT SANTIVIVUT
In three earlier articles we advisable shopping for the ProShares UltraPro QQQ ETF (NASDAQ:TQQQ) for speculative functions. The primary article was revealed August 16th. The second got here out October 11th whereas the third was revealed February 23rd.
The bullish suggestions had been based mostly on the report ranges of bearish sentiment that existed all final 12 months. Historical past exhibits that purchasing alternatives like this solely come alongside a couple of instances a decade and if there was ever a time to advocate TQQQ for speculative functions, it was clearly final summer season and fall.
Nonetheless, all that’s going away now and it is time to change into extra cautious. Whereas investor sentiment nonetheless signifies increased costs, the sign is far weaker, and we really feel that inside investor metrics in TQQQ warn in opposition to shopping for it right now.
This text updates these earlier articles and brings the symptoms they had been based mostly on updated.
Necessary Word
As a result of TQQQ is so extremely leveraged, the quantity of shopping for of TQQQ turns into a powerful indicator of what traders anticipate from the market. Whereas that is true of all ETFs, it’s way more so with the 2 extremely leveraged ProShares ETFs TQQQ and SQQQ. This makes analyzing what different traders are doing in TQQQ a robust device to determine if one can buy or promote the fund.
Due to this, a lot of the charts on this article present what traders are “doing” in TQQQ. At present, nonetheless, the message from investor exercise in TQQQ shouldn’t be as clear because it was a couple of months in the past, not less than in our opinion.
TQQQ NAV
This chart exhibits the online asset worth of TQQQ since inception. It additionally graphically exhibits its 3X volatility. In any sooner or later the fund’s funding technique can return 3 times the change within the underlying QQQ however over time there is a continuous erosion that does not present up in any sooner or later however accumulates over time. The first causes of this erosion are the underlying carrying prices that include implementing the ProShares leverage coverage.
This carrying value is often instantly proportional to rates of interest and it goes up when rates of interest rise. One of many causes these extremely leveraged funds did nicely previous to the bear market was due to the low rate of interest atmosphere throughout COVID. Buyers will now discover that carrying prices can be increased. This simply means the timing on the funding should be extra correct.
Internet asset worth of TQQQ since inception (Michael McDonald)
Development in TQQQ belongings appear to be lagging
The chart beneath graphs whole belongings in TQQQ since inception. What’s essential to note was the massive improve from $4 billion to over $20 billion throughout COVID bull market. A few of this was the value achieve however over half of it was because of the inflow of extra speculative cash into the fund.
What is especially noteworthy to us now could be the gradual asset progress accompanying the market rally of the final 5 months. Which means that consumers of TQQQ do not assume the rally has additional to go, which in a opposite method, means it most likely will. However the information shouldn’t be convincing sufficient, in our opinion, to come back to this conclusion. So, this statistic is at the moment inconclusive.
Whole belongings in TQQQ since inception (Michael McDonald)
The variety of shares excellent stays close to report ranges
As the following chart exhibits, the variety of shares excellent surged to a report stage through the late levels of the bear market, hitting all-time highs in January of this 12 months. Historical past exhibits {that a} surge in shares excellent usually happens at main shopping for alternative on this fund. It was the January surge in SO that prompted the February article.
Since then, SO have been declining. Because the graph exhibits it’s regular, after reaching a peak, for the variety of shares to slowly work its method again down because the rally continues. That is one optimistic indicator from inside investor exercise that factors to increased costs. However there are a selection of exceptions and it isn’t conclusive sufficient to proceed to take a bullish place on TQQQ, even for the quick time period.
Shares Excellent in TQQQ (Michael McDonald)
Every day shopping for ranges in TQQQ falling
This charts graphs the common every day shopping for ranges in TQQQ in {dollars}. Shopping for in TQQQ reached a peak of $10 billion a day in December 2021, on the very prime of the market. It is at the moment averaging solely $3.2 billion. Historical past exhibits that peak ranges of shopping for usually happen at worth peaks out there, so this indicator typically acts in a opposite method. This implies the low stage of shopping for is a optimistic indicator for increased costs, however once more this statistic is a weak hyperlink and we stay cautious about its message.
Common every day greenback shopping for in TQQQ (Michael McDonald)
Shopping for ranges in TQQQ as a p.c of belongings
A greater method to measure investor shopping for in a fund is to check the greenback quantity going into the fund to its whole belongings. The chart beneath exhibits that ratio since inception. Just like the earlier metric it exhibits that peak shopping for usually happens at a brief time period market prime. However there are quite a few exceptions, the obvious being the bear market low of 2020. Due to this the present low ratio of 24.8%, whereas most likely indicating increased costs, can be not conclusive.
Every day shopping for in TQQQ as a p.c of belongings (Michael McDonald)
The Grasp Sentiment Indicator nonetheless factors increased however …
The present studying of the Brief Time period – Grasp Sentiment Indicator is displayed within the chart beneath. Seven underlying sentiment indicators are used to create this every day measure and it’s a great indicator of quick time period market sentiment.
The 4 bearish readings from final 12 months are indicated by inexperienced arrows. Every indicated a brief time period market low. The earlier articles on TQQQ had been based mostly on the acute readings from this indicator.
However that is now not the case. Whereas the indicator continues to be above the zero line and on the bearish facet of the ledger, it’s quickly altering sides. So we do not consider it is the time to take a 3X lengthy place prefer it was final 12 months.
In our opinion this and different sentiment indicators are now not bearish sufficient to warrant the chance of taking a 3X lengthy place on the QQQ.
Brief Time period – Grasp Sentiment Indicator (Michael McDonald)
Abstract
Whereas a lot of the investor metrics in TQQQ, in addition to the grasp sentiment indicator, recommend that inventory costs are headed increased, we now not are as optimistic on TQQQ as we had been final 12 months. We do not advocate shopping for it in the meanwhile and we advocate promoting it if one is at the moment holding it.
Warning
As we talked about, there are massive dangers attempting to make use of TQQQ to revenue from market strikes. There’s a fixed downward worth bias and the chance of loss grows the longer one holds the fund. That is very true with increased rates of interest because the carrying value to leverage the fund 3X go up with increased charges. Each the ProShares web site and the SEC have detailed messages on the dangers inherent in leveraged ETFs.
