Why I Think the NASDAQ May Be in Trouble

I wanted to write a small post to describe what steps I took that led me to believe it was time to bail out of the ProShares Ultra QQQ ETF (QLD), and jump into the ProShares UltraShort QQQ ETF (QID).

First, general intuition came into play. I was not alone in feeling that the markets were over-bought. There was plenty of discussion on this topic in the financial press and on financial web sites and blogs. The economic news continues to be somewhat downbeat so the current healthy earnings season and rising stock prices came as somewhat of a surprise. This lack of correlation between the economy and stock prices sounded a cautionary note.

Checking the StockConsultant.com site, my overbought assumption seemed to be reinforced. The site showed PowerShares QQQ Trust, Series 1 ETF (QQQQ), for example, to be at the top of their proprietary RallyBand and the reversion to the filtered trend or down to the bottom of the RallyBand seemed to be the most likely next move. Indeed, the site indicated that the short trade had the most potential for success. The chart is below:

click to enlarge

I also checked the AmericanBulls.com site. Their candlestick analysis rated the QQQQ a Hold. Interestingly, they noted that they had put out a Buy signal 38 days ago. Since then, QQQQ had gained well over 5%. Based on that alone, I thought it was about time for a short-term pullback.

I also checked the TradeRadar BUY/SELL signal. I set the starting point at March 2, the bottom of the recent pulback that began in late February. I set the filtering to 2 days and looked for a SELL signal. Sure enough, the peak was there. The trailing edge did not quite dip down into the SELL zone but the strength of the signal, combined with the factors mentioned above, were enough to move me to be bearish on QQQQ. Here is how the signal looked:

click to enlarge

I don't presume to know whether this will be a short-term pullback or a longer term slide; nevertheless, I felt it was necessary to get out of QLD. These ProShares Ultra funds are great when the market is going in the desired direction but when it turns against you, it is difficult to watch these funds dive twice as fast as the associated index. I have decided that if I am going to hold these funds, I will take a short-term approach.

Comments

[wixeywaxy:]

There is something that just doesn't add up about these Funds that short the market. Supposedly the advantage is that you can only lose your investment. That's true but it's not the whole story. It the market goes up significantly in contradiction to all the indicators currently supporting a negative outlook the losses in these funds will be reflected in a value of less than their NAV and my bet is by a much larger % than we usually see on the standard variety of Funds because the managers must buy back shares when pressed and at the same time generate cash to redeem the funds shares from patrons exiting. This scenario is a sure thing to eventually occur even if their is some intermediate gains and maybe even more certain if there are early gains sucking in more unwitting investors. Short selling is a losing proposition most of the time for the typical investor and these funds haven't got a formula that will change that. Vic

2007 May 15 09:57 AM

[Quaker:]

In any given year, the stock market can lose 50% of it's value. In most cases, losses are much more abrupt than gains. In Nasdaq, which is more a ponzi scheme than an actual market, a 50% drop wouldn't even give the market a low pe, relative to legitimate companies.

The markets have not beaten CD or treasury yields since the 1999 run up. It is trading at historically high PE's and these PE's are deflated by historically low depreciation, low capex and historically high stock buy backs. IMO, if a person doesn't know how to short Nasdaq, they have no business being long.

2007 May 15 10:57 AM