Saturday, March 01, 2008

UltraShort ETFs as a Sentiment Gauge

In my last post, I mentioned that volume has been exploding in such UltraShort ETFs as QID, which takes a double-sized short position in the NASDAQ 100 Index.

Because QID (and its S&P 500 Index equivalent, SDS) expresses an aggressive bearish opinion on the market, it might be ideally suited to serve as a sentiment gauge. A look at the trade data finds that at recent market bottoms, such as March, 2007; August, 2007; and January, 2008, daily QID volume has expanded to twice or more of its average trading volume. That is, traders seem to become most aggressively bearish just as markets are making an intermediate-term low.

It's in that vein that I note, with Friday's stiff decline, that trading volume in QID did not show any expansion. Indeed, it was slightly below its 20-day moving average. It's when the ultra bears become ultra bearish that I will be most likely to look for a meaningful market bottom.


NASDAQ Volume and Sentiment

Sentiment and the Last Hour of Trading