Assessing Speculative Activity: ProShares Ultra ETFs as Emotionality Indicators

A while back, I noted that volume among the ProShares Ultra S&P 500 ETFs tended to jump during market selloffs. I updated this view to express volume in the Ultra Long ETF (SSO) plus volume in the Ultra Short ETF (SDS) as a function of total NYSE volume (pink line above). As we can see from the blue line representing the S&P 500 Index itself (SPY), we've seen a steady increase in Ultra volume during the recent decline, with a particularly notable spike in mid-October, when we hit a peak in the number of stocks making new 52-week lows.

Interestingly, the volume in SDS and SSO as a proportion of SPY volume rose from about 13% in early September to over 30% during the last two weeks. Moreover, if we look at yesterday's volume among all North American ETFs, Ultra funds occupied three of the top eight positions.

Because the Ultra funds are double-size relative to other index ETFs, they are excellent tools for assessing speculative activity in the stock market. What we've tended to see, when we correct for an ongoing rise in the popularity of the Ultra shares, is enhanced speculative activity when markets correct and a relative drying up of such activity as markets top out. From the perspective of sentiment, this may be a nice measure of market emotionality: fear/greed versus complacency.

Comments

[dr.doolittle:]

great stuff. "fear/greed" seems exacty right. having it opposed to "complacency" I'm not so sure of. the government is bailing out the pensioners--it seems to me I would categorize these folks (in a market sense) as "defensive" or if I may coin a phrase "common sensive." there is a workaday profit world that most people interact with everyday but don't even notice. Even though it appears "complacent" it would seem to me that what it really is is "consistent" or perhaps just "there." The "bezerker class" gets going when energy prices soar--and now that energy and all the commodities attached to it have collapsed I think this represents an excellent time to put them on the couch. I like the idea that psycology affects the market participants--how does such a crushing defeat affect the institutions these individuals represent? Will they "strike back"? A "terrorist" attack perhaps? Acceptance? Honesty? Helping those who have no intention of returning the favor? Looking at capital flows is interesting as a measure of speculation, but that is about to dry up now that lending for such activities is simply done for. Market participants will still be buying, however. It's the psychology of the "sell" or "loss" side that seems quite salient at present.

2008 Nov 06 12:14 PM