2023-09-18 23:46:44 ET
Summary
- Last August, TQQQ was recommended for a short-term trade based on bearish sentiment, but investors should now take a profit on half of their position.
- The equity "puts to calls" ratio is higher now than a month ago and at the level that occurred at the COVID bear market low. This is very bullish.
- The Hulbert Survey of NASDAQ Newsletter Writers shows a shift back toward bullish sentiment but not yet at a level to reverse the previous buy signal.
- Even though the “puts to calls” ratio strongly points to higher prices, we're sticking to the original plan and recommend selling half the position in TQQQ based on August 14th trade.
- This is to lock in some profit and reduce global event risks, which can undo any strong, sentiment-based buy signal.
On August 18th , we recommended buying TQQQ for a short-term trade based on the rapid change to bearish sentiment that occurred in early August. Investors are now wondering if they should sell half the position as we initially recommended they do if the market rallied for four weeks. So, it's time to reassess the trade and look again at the indicators that prompted it.
The Equity Puts to Calls Ratio
Equity Puts to Calls Ratio (The Sentiment King)
The first indicator that prompted this trade was the high, equity “put to call” ratio. Its rapid rise a month ago marked a surge in investor bearishness; something that normally occurs right before a rally. We wrote about our years of experience with this phenomenon and explained why we thought its occurrence was so important.
As you can see from the chart, the ratio is higher today than it was a month ago. In fact, the ratio (black circle) is back to the same level that marked the low of the COVID bear market. This continues to be a very bullish sign for this market.
The Hulbert Survey of NASDAQ Newsletter Writers
This was the second indicator that prompted the but signal. Since TQQQ is a leveraged QQQ, which is basically a NASDAQ ETF, it's important to look at what advisors are recommending with regard to the QQQ. The Hulbert survey does that. It shows the difference as a percentage between the number of bullish or bearish NASDAQ newsletter writers.
Hulbert NASDAQ Writer Bullish Bearish Survey (The Sentiment King)
You get spikes in the percent above the zero line, right before markets rally. We indicated with black arrows moments when this rapid change in sentiment occurred. It was the last arrow on the right that prompted last month's buy signal.
Since then the percent has been switching back over to the bullish side, as indicated by the black circle. This is normal after a small rally but it's not yet worrisome or at a level that would reverse last month’s buy signal.
TQQQ Relative Strength
The third indicator we looked at was the oversold condition of TQQQ relative strength. It's shown below. It was the existence of this oversold condition that confirmed in our mind the strong buy signal that the "puts to calls" ratio and the NASDAQ survey were giving.
TQQQ Plotted Against RSI (The Sentiment King)
Relative strength has increased with the subsequent rally but is now coming back down slightly and is currently just below 50 at 46. This is still far from a technical sell signal of 70.
Should Investors Sell Half the Position?
In last month’s article, we wrote this:
With this trade, a profit will take care of itself. If the price does move higher, I believe one should sell half the position after about four weeks. It's more a time target than a price target. This helps reduce any price erosion due to carrying costs. The selling of the remaining position would be determined later.
As we write this article, TQQQ is up 12%. We expected a larger, four-week gain but it didn’t happen. There remain critical global event risks that can undo any strong buy signal due to market sentiment. So, even though the “puts to calls” ratio strongly points to even higher prices, we're sticking to the original plan and recommend selling half the position in TQQQ based on this trade.
Warning
As we mentioned in the first article, there are unusual risks investing in TQQQ. There is a constant downward price erosion which grows with time. This is even more true now with the high short-term interest rates engineered by the FED. This increases the carrying costs of highly leveraged 3X funds. Both the ProShares website and the SEC have detailed messages on these risks.
For further details see:
Traders Should Sell Half Their Position In TQQQ?