PSQ - Is It Time To Short QQQ By Buying PSQ?

2023-05-29 22:33:01 ET

Summary

• Buying in PSQ has gone from 15% of assets to the current ratio of 39.1%, which is one of the highest buying ratios in fund history.
• It’s highly unusual to have investors buy short funds as the market rises. History has taught us this is an indicator of tremendous market strength.
• We can't emphasize enough how powerful a sentiment signal this is for QQQ to go higher and PSQ lower.

Last year’s caution against PSQ

We've been recommending investors stay away from ProShares Short QQQ ETF (PSQ) since a June article last year. In the article we wrote:

It's also time to stay away from bearish ETFs like SH, DOG and PSQ and not go short the market.

In fact, more than forty articles published over the last twelve months contain the montage of sentiment indicators that have kept us continuously bullish on the market since June. So far, this bullish stance, in the face of almost everyone calling for a recession, has been correct.

We’re now going to look at the current state of metrics of investor activity in PSQ that made us so cautious on PSQ last June.

Investor interest in PSQ is increasing as QQQ rallies

At the Sentiment King we make market forecasts based primarily on investor sentiment and the theory of contrary opinion. We also use investor activity in ProShares funds like PSQ to help determine whether to invest in a ProShares fund.

With a short fund like PSQ, you want to avoid the crowd. If one intends to buy PSQ it’s bad to see a lot of other investors doing the same thing, which is what we currently see. In a sense buying in PSQ acts as a contrary opinion indicator like the old, short selling indicators of the past.

Buying PSQ as a percent of assets is rising

The graph is a chart of daily buying in PSQ as a percent of assets, plotted against the [[QQQ]]. We used this same chart a year ago to avoid PSQ.

Using black arrows, we've pointed to moments when this indicator signaled large amounts of buying in PSQ. These moments almost always occurred at major lows in the market, prior to a significant advance. In fact, it was large amount of buying in 2022, highlighted by the two arrows, that prompted our June article on PSQ.

It should be noted that the percentage of buying in PSQ has been rising since the start of the year. Buying has gone from 15% of assets to the current ratio of 39.1%, which is one of the highest buying ratios in fund history. It should likewise be noted that this increase in buying has occurred while QQQ has been rallying.

It’s highly unusual to have investors buy short funds as the market rises. History has taught us this is a forecast of tremendous market strength. It also suggests that investors should avoid this investor crowd by avoiding PSQ.

Absolute buying in PSQ is also rising as QQQ moves higher

We prefer measuring buying as a percent of assets, as in the previous chart, because the ratio is independent of AUM. Sometimes, however, it's insightful to look at absolute buying levels, which the next chart shows.

This chart, which shows daily purchasing in PSQ is now averaging $510 million a day, highlights the fact that buying in the fund is near all-time highs.

Again, we want to point out that this record buying is occurring after a five month rally in QQQ. We can't emphasize enough how powerful a sentiment signal this is for QQQ to go higher and PSQ lower. It reinforces the recommendation that investors stay away from PSQ.

Price charts of PSQ

This long term price chart of PSQ highlights the extreme risk of going short the market for any extended period of time. Since 2009, prices of PSQ have fallen from over $320 down to around $13. Long-term studies show that stock prices rise 2/3 of the time and decline only 1/3. Going short the market only has value if one's timing is good enough to catch a bear market down wave, which is very difficult to do.

This next chart shows the price of PSQ over a shorter time period of 3 1/2 years.

After the price increases during the bear market in 2022, the chart shows the decline in PSQ since January as the QQQ has rallied. We've included with a red arrow our projection for the next four or five months for PSQ. It’s based on the strong price gains in QQQ that the previous two indicators suggest. We expect PSQ to decline about 20%.

Bull market or bear market rally?

This is the real issue that determines whether PSQ is a good investment at this time.

We wrote about this important question in a recent article . If this is still a bear market rally, May 26 ^th is the cutoff that makes it the longest bear market rally in history. Bear market rallies can only last so long, and we are at the historical limits at this time.

We're at a most critical moment in this market. If it goes higher from here we think investors have to admit we still can't be a bear market rally. We think the evidence heavily points to the start of a new bull market.

This accumulated evidence points to PSQ not being a good investment at this time and for investors who are currently in the fund to sell it.

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