In three previous articles we recommended buying the ProShares UltraPro QQQ ETF (NASDAQ:TQQQ) for speculative purposes. The first article was published August 16th. The second came out October 11th while the third was published February 23rd.
The bullish recommendations were based on the record levels of bearish sentiment that existed all last year. History shows that buying opportunities like this only come along a few times a decade and if there was ever a time to recommend TQQQ for speculative purposes, it was clearly last summer and fall.
However, all that is going away now and it's time to become more cautious. While investor sentiment still indicates higher prices, the signal is much weaker, and we feel that internal investor metrics in TQQQ warn against buying it at this time.
This article updates those previous articles and brings the indicators they were based on up to date.
Important Note
Because TQQQ is so highly leveraged, the amount of buying of TQQQ becomes a strong indicator of what investors expect from the market. While this is true of all ETFs, it is much more so with the two highly leveraged ProShares ETFs TQQQ and SQQQ. This makes analyzing what other investors are doing in TQQQ a powerful tool to decide if one should buy or sell the fund.
Because of this, most of the charts in this article show what investors are “doing” in TQQQ. Currently, however, the message from investor activity in TQQQ is not as clear as it was a few months ago, at least in our opinion.
TQQQ NAV
This chart shows the net asset value of TQQQ since inception. It also graphically shows its 3X volatility. In any one day the fund’s investment strategy can return three times the change in the underlying QQQ but over time there's a continual erosion that doesn't show up in any one day but accumulates over time. The primary causes of this erosion are the underlying carrying costs that come with implementing the ProShares leverage policy.
This carrying cost is usually directly proportional to interest rates and it goes up when interest rates rise. One of the reasons these highly leveraged funds did well prior to the bear market was because of the low interest rate environment during COVID. Investors will now find that carrying costs will be higher. This just means the timing on the investment will have to be more accurate.
Growth in TQQQ assets seem to be lagging
The chart below graphs total assets in TQQQ since inception. What's important to notice was the large increase from $4 billion to over $20 billion during COVID bull market. Some of this was the price gain but over half of it was due to the influx of more speculative money into the fund.
What is particularly noteworthy to us now is the slow asset growth accompanying the market rally of the last five months. This means that buyers of TQQQ don't think the rally has further to go, which in a contrary way, means it probably will. But the data is not convincing enough, in our opinion, to come to this conclusion. So, this statistic is currently inconclusive.
The number of shares outstanding remains near record levels
As the next chart shows, the number of shares outstanding surged to a record level during the late stages of the bear market, hitting all-time highs in January of this year. History shows that a surge in shares outstanding normally occurs at major buying opportunity in this fund. It was the January surge in SO that prompted the February article.
Since then, SO have been declining. As the graph shows it is normal, after reaching a peak, for the number of shares to slowly work its way back down as the rally continues. This is one positive indicator from internal investor activity that points to higher prices. But there are a number of exceptions and it's not conclusive enough to continue to take a bullish position on TQQQ, even for the short term.
Daily buying levels in TQQQ falling
This charts graphs the average daily buying levels in TQQQ in dollars. Buying in TQQQ reached a peak of $10 billion a day in December 2021, at the very top of the market. It's currently averaging only $3.2 billion. History shows that peak levels of buying normally occur at price peaks in the market, so this indicator generally acts in a contrary way. This means the low level of buying is a positive indicator for higher prices, but again this statistic is a weak link and we remain cautious about its message.
Buying levels in TQQQ as a percent of assets
A better way to measure investor buying in a fund is to compare the dollar amount going into the fund to its total assets. The chart below shows that ratio since inception. Like the previous metric it shows that peak buying normally occurs at a short term market top. But there are numerous exceptions, the most obvious being the bear market low of 2020. Because of this the current low ratio of 24.8%, while probably indicating higher prices, is also not conclusive.
The Master Sentiment Indicator still points higher but ...
The current reading of the Short Term - Master Sentiment Indicator is displayed in the chart below. Seven underlying sentiment indicators are used to create this daily measure and it is a wonderful indicator of short term market sentiment.
The four bearish readings from last year are indicated by green arrows. Each indicated a short term market low. The previous articles on TQQQ were based on the extreme readings from this indicator.
But this is no longer the case. While the indicator is still above the zero line and on the bearish side of the ledger, it is rapidly changing sides. So we don't believe it's the time to take a 3X long position like it was last year.
In our opinion this and other sentiment indicators are no longer bearish enough to warrant the risk of taking a 3X long position on the QQQ.
Summary
While most of the investor metrics in TQQQ, as well as the master sentiment indicator, suggest that stock prices are headed higher, we no longer are as positive on TQQQ as we were last year. We don't recommend buying it at the moment and we recommend selling it if one is currently holding it.
Warning
As we mentioned, there are large risks trying to use TQQQ to profit from market moves. There is a constant downward price bias and the risk of loss grows the longer one holds the fund. This is especially true with higher interest rates as the carrying cost to leverage the fund 3X go up with higher rates. Both the ProShares website and the SEC have detailed messages on the risks inherent in leveraged ETFs.
Michael James McDonald
Michael James McDonald is a stock market forecaster, author and former Senior Vice President of Investments at what is now Morgan Stanley. He is a long-term advocate of the theory of contrary opinion and the measurement of investor sentiment when forecasting price direction.His first book, " A Strategic Guide to the Coming Roller Coaster Market" was published in June of 2000, three months before the top of the dot comm market. On its cover was written, "How a new model of the stock market predicts the end of the 18-year bull market (1982-2000) and the beginning of a new era." The "new era" was to be a long-term (roller coaster) trading range market, which did materialize between 2000 and 2009.Then, on August 31st, 2010, in a SA article titled: "The 10 Year Trading Range Is Over - The 'Final Stampede' Has Begun", he called an end to this trading range market and the beginning of another long-term bull market, which also came about. Through his company the Sentiment King, he continues to study and do what he loves - research and attempt to successfully forecast major stock trends - and help others see them too.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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