Watch the Double-Inverse ETF for Sentiment

The week’s trading volume has been on the thin side, particularly for an options expiration week. Of course, not all volume is created equal.

One the areas of the investment world where I pay close attention to volume is double inverse ETFs, which include the UltraShort ETFs pioneered by ProShares. The double inverse ETFs are an attractive set of investment vehicles for speculative bears to place their bets, because the oversized payoff if they are correct.

Of the double inverse ETFs, I am particularly fond of the QID, the double inverse ETF for the NASDAQ-100 index [NDX]. The QID has captured the imagination of many retail investors who are not particularly comfortable going short, but have no qualms about making a bearish investment by going long an inverse ETF. Volume patterns in this ETF demonstrate that the QID can be an effective contrarian indicator. Take the chart below, for example, where a 5 day EMA of the volume has been a good indicator of tops in the NDX (the gray area chart on the top) when it rises above the 45-50 million share level.

In a broader sense, ETFs are opening up a new frontier for those who are interested in market sentiment. I will be sharing some of my thinking in this area in the weeks and months ahead.

Comments

[Badcowboydan]

Was this an article, or a catchy headline to sell ad space?

[carey_jim]

Inverse ETF's are, of course, an easy way of making a profit when you think things are going to hell, in general, or even in particular.

They give a new meaning to the concepts of economic pessimism and the orderly decline of markets: We don't have to feel guilty anymore predicting bad things, if we truly see them coming, because we can still make money, lots of it, on the way down.

Without them, there would be even more dishonest "talking markets up" than there is now, and there's far too much of it already.

Tracking pessimistic predictions can be just as useful as tracking optimistic predictions.

[alphameister]

Good insight. I look forward to reading your future postings on this subject.

[jlounsbury59]

Bill - - -

Ignore the trash talk and keep up the good work!

[lblaine]

The correlation is not that evident. The volume spikes in August 07 and March 08 correspond to low points in the NDX, while spikes in Nov 07 and May 08 correspond to high points in the NDX.

[User 5087]

This statement:
"Volume patterns in this ETF demonstrate that the QID can be an effective contrarian indicator." Makes no sense whatsoever. Why bother even entering this piece?