2023-03-13 07:14:10 ET
Summary
- The buying of short ETFs opens the door to the mind of the short seller.
- Since last June, investors have been consistently buying more ProShares short funds than long funds.
- This is opposite the top of the market in December of 2021, when five times more money was going into long funds than short funds.
- We believe the current ratio of 1.48 times more money buying short funds than long funds forecasts higher prices.
The ProShares Fund Family
ProShares is the largest fund family that offers a multitude of short ETFs. They also provide daily access to the number of shares outstanding, total assets and NAV of all their funds. This allows us to do detailed calculations on the amount of money investors are putting into long funds versus short funds. This in turn provides insight into what investors are generally thinking. In a sense we use it like the old, odd lot short selling ratio of the past.
This table lists the long and short ProShares stock funds that we use in our calculations. We use 41 short funds and 60 long funds and, as of 3/10/2023, the 61 long funds have $38.4 billion in assets while the short funds contained $14.9 billion.
Long and Short ProShare Funds Used in Calculating our Short/Long Buying Ratio (Michael McDonald)
Calculating Buying in a Fund
One difference between an ETF and a stock is that, with a stock, the total number of buyers and sellers is always equal. This isn't true with an ETF. With an ETF, when there are more buyers than sellers, the firm creates shares to fulfill the buyer needs. When there are more sellers than buyers, they simply retire the excess shares. This causes the shares outstanding to float up and down depending upon demand.
If investor buying exceeds selling, sales for the day is the amount of buying. You can determine these days because the shares outstanding increase. Multiply sales by the daily NAV and you have the amount of money going into the fund. If shares outstanding drop, then just a percentage of total sales represents buying. We keep track of these numbers on a daily basis in all 60 long and 41 short funds.
We then form a ratio over 20 days of the total amount of money going into the short funds divided by the total going into the long funds. The chart below plots this ratio against SPY back to 2011. The pink area represents periods when more money is going into the long funds then short funds; the green area is the opposite.
Ratio of Buying of ProShare Short Funds versus Long Funds (Michael McDonald)
As you would expect, most of the time more money is going into long funds than short funds. However, at critical lows in the market, the opposite occurs. At major lows investors insert more money into short funds than long funds convinced that prices will go lower. This is just like the odd lot short selling ratios of old.
It's the common idea that when too many investors go to one side of a trade, it's time for the opposite move. The green arrows point to moments when buying in short funds reached the greatest amount compared to long funds.
Since last June, investors have been consistently buying more ProShares short funds than long funds. This is the longest "bearish" period since we began our calculations. We believe the current ratio of 1.48 times means that prices are headed higher.
This indicator also helps show periods when there is too much bullish sentiment. The red circle indicates the top of the market in December 2021, when five time more money was moving into long funds than short funds.
Indicators that measure buying over the shorter period of 7 days go into the construction of out Short Term Master Sentiment Indicator (ST-MSI) explained here .
For further details see:
Too Many Investors Are Buying Short Funds