A Short-Term Buying Opportunity Has Arrived – Use TQQQ For Market Leverage

Summary

Two indicators we follow suggest the three-week market correction is over and a rally is about to begin. The rally should last a minimum of four weeks, probably longer. One indicator suggests the major market index to use is the QQQ, or leveraged variants of it.

Because of the short-term duration of the expected move, we feel it’s ideal for the ProShares 3x QQQ symbol – TQQQ. This ETF was designed specifically for short-term trades like this, since the major risks in leveraged ETFs, other than increased volatility, come from the carrying costs of holding them long term.

Essentially, we think the market is about to start a long-term topping process of the advance that started last October. During a topping process, there will be trading opportunities like the one we currently see. Short-term strategic investments like this can help increase the low, buy and hold returns the market usually produces during a topping process.

The Evidence

Trading opportunities are best found using indicators that measure investor activity and investor expectations. In the current situation, the indicators are the “puts to calls” ratio and the Hulbert survey of NASDAQ newsletter writers. We believe the current situation presents a wonderful opportunity to show how these indicators are used to trade the market – no guarantees, of course.

The CBOE equity “puts to calls” ratio measures what option speculators expect the market to do. It has a history that goes back to 1974. A high ratio means too many speculators are expecting prices to decline, and history shows prices will generally move opposite that expectation. It’s a contrary opinion in action. In the chart, we indicated with arrows three moments when high ratios represented major bear market lows.

At this time, however, we’re using the ratio to help find the end of a correction, and we’ve circled the recent rise in the ratio from .50 to .80 to show the current situation. This is one of the highest ratios in history. To us, this rapid increase in bearish expectations generating one of the highest ratios in recent history is a strong sign the correction is ending.

The next chart shows the Hulbert survey of NASDAQ newsletter writers. The survey has a history back to 2000.

This chart measures the percentage of newsletter writers who are bullish on the NASDAQ index versus those who are bearish. The zero line represents when they’re equal.

Notice, after reaching an extreme of 80% a few weeks ago, the ratio has been rapidly rising and is now back to the zero line. We’ve indicated it with a green oval and also point with black arrows, moments when this occurred in the past during a rising market. More often than not, they signaled short-term buying opportunities.

We believe this metric confirms what the “puts and calls” ratio is indicating – that the three-week decline is ending, and a short-term rally in QQQ is about to start.

TQQQ

The chart below graphs TQQQ over the last two years. It highlights why TQQQ is not a good investment over the long term. It is, however, good for what it was intended; to profit from market moves expected to last from a few days to a few weeks.

The red numbers 1 and 2 show the current price compared to a year ago and highlight why TQQQ is not a good, long-term investment. While QQQ is down only 10% from the highs made two years ago, this 3X ETF is down over 50%. This massive erosion in value is due to the high carrying costs of maintaining 3X leverage. This erosion in value is time-dependent, however, and not a major risk when making a four-week trade.

The green curve at the bottom is the relative strength of TQQQ, and it’s currently at a level reached (red circle) before the start of many short term rallies. The last time it was this low was January 2023 at the start of its rally.

This is the third indicator supporting the idea that the correction is over and the market about to begin a rally of at least four weeks. A rally in TQQQ just back to the high made three weeks ago would be a gain of 18%.

TQQQ Trading Strategy

It’s our opinion the best strategy to use in the current situation is to invest 2/3 now, then another third if the price of TQQQ drops to $35.00, which it could on a one or two day spike lower. If the price breaks below the trend line and reaches $32, the entire position should be liquidated, and a loss taken.

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.

Warning

As we mentioned, there are unusual risks investing in TQQQ. There is a constant downward price erosion that increases the longer one holds the fund. This is especially true now with higher interest rates since the carrying cost to leverage the fund 3X increase as rates move higher. Both the ProShares website and the SEC have detailed messages on the inherent risks using leveraged ETFs.