Using UltraShort ETFs as a Sentiment Gauge

In my last post, I mentioned that volume has been exploding in such UltraShort ETFs as QID, which takes a double-sized short position in the NASDAQ 100 Index.

Because QID (and its S&P 500 Index equivalent, SDS) expresses an aggressive bearish opinion on the market, it might be ideally suited to serve as a sentiment gauge. A look at the trade data finds that at recent market bottoms, such as March, 2007, August, 2007, and January, 2008, daily QID volume expanded to twice or more of its average trading volume. That is, traders seem to become most aggressively bearish just as markets are making an intermediate-term low.

It's in that vein that I note, with Friday's stiff decline, that trading volume in QID did not show any expansion. Indeed, it was slightly below its 20-day moving average. It's when the ultra bears become ultra bearish that I will be most likely to look for a meaningful market bottom.

Comments

[hattryx:]

1. track qid volume
2. ??
3. profit!!

2008 Mar 03 09:25 AM

[kkin365:]

Between QID and SDS, which is a better sentiment gauge? In the former, a couple of issues seem to dominate QID's movements.

2008 Mar 03 09:37 AM

[Ex15:26:]

Great stuff. Thanks. I have been trading the DXD, QID, and SDS - selling after several days of run ups and then buying after the overall markets have a two or three day run. While this has been profitable, it has been based more on feelings than any data I could point to. I'll begin tracking these to tighten up my entries and exits.

2008 Mar 03 10:01 AM

[thinking ahead:]

Ahem. For every QID buyer there is a QID seller, right? So if there are lots of people buying QIDs, the volume of QID sellers is equally high, right? The new-bear buyers exactly equal the old-bear sellers.

I think what you are looking for is price action on QID options. Now that is a useful sentiment indicator.

2008 Mar 03 02:53 PM

[locke:]

Thinking ahead: There does not have to be a seller for every buyer in ETFs. ETFs can be created out of thin air. They are like mutual funds. Send more money to the fund and it buys more stuff, seller or not.

2008 Mar 03 04:34 PM

[buyitcheaper:]

The 4 horsemen account for 40-50% of the weighting of the QID, so you'd almost be better off to short them instead.

and if you really want crazy FXP options. Opened at the right point, you could close a double or more daily. (yeah, that is a big IF...)

2008 Mar 04 12:17 PM