Massive Buying In SQQQ Indicates A Bear Market Bottom

Summary

• Massive buying of the bear fund ProShares UltraPro Short QQQ ETF confirms what other contrary opinion indicators have been saying - that we have probably made a major bear market bottom.
• At its peak, daily purchases sometimes reached over 400% of the assets in the fund.
• This was almost double the buying levels in the fund at the worst of the 2020 COVID bear market.

Pgiam/iStock via Getty Images

Buying of SQQQ vs QQQ (Michael McDonald)

Contrary Opinion Indicators

We wrote three articles in July explaining how numerous contrary opinion indicators are pointing to the end of this bear market. This was done to document the power of contrary opinion at locating important market bottoms and, in the process, help you make money.

The first article in the series on June 30th covered new indicators based on the buying of three, bearish exchange-traded funds ("ETFs") - ProShares Short S&P 500 (SH), ProShares Short Dow 30 (DOG) and ProShares Short QQQ (PSQ).

In that article, however, we failed to include readings on the most popular ProShares bear fund, the ProShares UltraPro Short QQQ ETF (NASDAQ:SQQQ). We are remedying that omission in the current article, which is really an addendum to the June 30th article.

Measuring "Bear Market" Buying

How do you measure investor buying in bearish ETFs? Looking at daily sales is insufficient, since it doesn't specify how much is from investor buying. With individual stocks, sales do represent the amount of buying, since buying and selling are always equal. But with ETFs they aren't. If there are more buyers than sellers of an ETF, the fund creates more shares for the excess buyers. If there are more sellers than buyers, they retire the excess shares.

So, sales numbers alone don't tell you how much money is going into or out of an ETF; you must combine sales with changes in the number of shares outstanding to determine that. Once done, you then multiply the number of shares being purchased by the fund's NAV to determine how much money is going into the fund on a daily basis. We then form a twenty-day moving average to smooth out the results.

Measuring the dollar amount going into a fund is not the best metric, however. What's better is dividing the amount of money going into the fund by the total assets in the fund. Producing a ratio like this allows for historical comparisons; absolute values don't. This ratio or percent is like the old, short selling indicators of the 1960's and 1970's, where the amount of short selling was divided by the amount of total selling.

The Results

The results of doing this for SQQQ are shown in the chart above. It's similar to the charts of the three other bear funds in the earlier article but much more dramatic.

Purchases of SQQQ have been more intense during this bear market than any other period over the last 10 years. What is particularly striking is the percentage of daily buying two months ago, which reached 300% of net asset value. This is far above that of the other three bear funds, which reached peaks around 50%. While the latest number is down from its peak, the current reading of 110% remains historically very high and what one might expect after a few weeks of rising prices.

We believe the extreme buying in SQQQ is added confirmation that we have reached a major low in this bear market.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of QQQ, SPY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Comments

[manfmnantucket]

well, this aged well...$40 at Strong Sell, $60 today after SPY falls another 14% lol. 50% gain on sqqq

[Blue Goose]

A lot of retail continue to think that the economy and the stock market are directly correlated. They're not. The market is already looking waaaay ahead to next year when CPI and PPI prints will be way lower. Interest rates will start to decline over the next 6-18 months as well. That means Tech will lead the way. The SQQQ is not what you want to buy. You will lose a lot of money!

[YO long-short]

@Blue Goose Well the FED and all its mouthpieces are saying interest rates are headed over 4% and will not be cut in 2023....So that would make growth tech stocks a place where you lose a lot of money!

[Blue Goose]

@YO long-short They also said inflation was transitory a year ago.
Just look at prices of so many things that have come down and continue to decline. Lumber, crops, and many other commodities. Look at the baltic dry index.
Many of the supply issues created by covid are almost back to normal.
The war will most likely be over within the next year.
Look ahead.

[YO long-short]

@Blue Goose Even if prices inflated at 0.0 to end of year we still will be at 6% inflation by year end so expect 4% fed rate by 2023. Then you will get a recession of some kind so growth will shrink. Lastly rents and wages tend to be sticky unlike goods so inflation will be with us for most of 2023. The next 2 years will likely be slow growth and VALUE stocks with dividends like oil and gas will lead not tech growth. That will slump

[Mredlark]

Your week's away from being crushed.

[huthutho]

Contrarian opinions are, well.. contrarian! I liked your first article a great deal and appreciate your posting this follow-up on SQQQ. Whether it turns out to be a bear market rally or the start of digging out of a shallower recession than expected by many, we'll have to wait to see. I'm trying to understand the bond market's view/impact, and looking at PSLDX management's strategy.

[David Vord]

Have we really created more wealth since 2019? If so, have we created 50% more wealth since 2019?

Climate change will be affect the economy sooner or later, China will invade Taiwan sooner or later. It's only a matter of time until investors realize this.

Your reverse psychology point is well taken but on the other hand, we haven't had a crash like 2008 since... 2008. I'm curious how oversold SQQQ would've been then.

[Prudencepreferred]

@David Vord its only a matter of time’ - indeed. The interesting question is the forward calendar. And no one has a clue. How much time?

[David Vord]

@Prudencepreferred When will China invade Taiwan? Probably within Xi's lifetime. When will we get f-ed by climate change? We already are. The thing is, these things are catastrophic, they're not just going to cause the bubble to pop, they're going to make it so we have to change our lifestyles fundamentally. When will investors realize this? I have no idea, but the fact SQQQ is being bought a lot, and the fact the VIX is still very high relative to the past, indicates people are fearful. That's all I know.

[Blue Goose]

@David Vord Waiting on a black swan event is a very bad investing plan!

[Stevlg]

And then there’s the extinction of
Black swans of comfort…..

[stumpy58]

This article is, itself, the contrary opinion.

[Bilbozark]

Bam! No speculation, just watching the Market. If you want to eat venision, go to where the deer are, but first you have to be a patient observer.

[swilner]

Is the data behind this indicator available on the Proshares website?

[Michael James McDonald]

@swilner Yes

[easyxpress]

My most accurate indicator is the contrarian indicator, but it's on the SA's articles of opinions such as this one. I don't have the crystal ball, nor the author. But if history is any guide, my contrarian will be more correct than the author's. We'll see.

[User 18282742]

Both NASDAQ and NASDAQ 100 had a bullish engulfing candle reversal for the month of July. This is significant as bullish engulfing candle reversal marked the lows of Nov. 1990, March 2009, Oct. 2011 and April 2020. They all marked significant turning points/bottoms.

My view is that we have a good August, followed by a typically weak Sept. Pullbacks are buying opportunities. See Ned Davis's Cycle Composite for the calendar 2022 trade-- it has been spot-on so far in 2022, like it was in 2021.

[Fast_Times]

Or, people could be buying the fund, because they believe that a market crash is imminent, that would be more logical.

[Blue Goose]

@Fast_Times They're going to lose a lot of money.

[G_X_C]

The market is already 25% higher than the bottom.

[Michael James McDonald]

@G_X_C Yes it is. As I said this article is an addendum to the original article which was written June 30th when the market was a few points off the bottom. It just verifies what that article said about the market. As I said, I omitted covering SQQQ (I covered the bear funds SH, PSQ and DOG) in the original article and its being added here for completion.

[KeepEmotionsOut]

@G_X_C right, and 25% higher in such a short time frame so we know very well how this is not sustainable and where it will end up.

[Mony Mony]

@G_X_C Old habits are hard to get rid of. Dip buying is still alive. This market is still full of TINA, FOMO,and FANG traders.

[KeepEmotionsOut]

This article makes no sense.

[Michael James McDonald]

@KeepEmotionsOut This is an article about contrary opinion. I think the original article better explains what's going on. Remember, this is an addendum on that article. Please read.

[Michael James McDonald]

@KeepEmotionsOut I think it will make better sense if you read the original article. This whole thing is about measuring contrary opinion.

[KeepEmotionsOut]

@Michael James McDonald thanks but there will always be some options and then contrary side to everything. I will read the article again but doesn’t understand how it fits in.

[j. hughes]

I am afraid you are clutching at straws, Mr. McDonald. I wish you luck, you will need it.

[San Marzano]

Right!

The fed is taking $1.1T out of bond purchases and selling another $1T off its balance sheet and raising rates.

Its a buy!

[Be kind, Be wise, Be wealthy]

Why would someone buy SQQQ if they thought we are at the bottom or low in bear market? They would be buying TQQQ?

[seek2945]

@Be kind, Be wise, Be wealthy They're buying SQQQ because the majority believe a bigger drop is coming. If you believe in reverse psychology it indicates the market has hit bottom.

[Be kind, Be wise, Be wealthy]

@seek2945 if they think a bigger drop is coming then they would not think we are at the bottom or major low. The message above seems conflicting.

[Michael James McDonald]

@Be kind, Be wise, Be wealthy This is an article about contrary opinion. I think the original article better explains what's going on. Remember, this is an addendum on that article