Wednesday, November 05, 2008

ProShares Ultra ETF Volume: A Look at Stock Market Emotionality

A while back, I noted that volume among the ProShares Ultra S&P 500 ETFs tended to jump during market selloffs. I updated this view to express volume in the Ultra Long ETF (SSO) plus volume in the Ultra Short ETF (SDS) as a function of total NYSE volume (pink line above). As we can see from the blue line representing the S&P 500 Index itself (SPY), we've seen a steady increase in Ultra volume during the recent decline, with a particularly notable spike in mid-October, when we hit a peak in the number of stocks making new 52-week lows.

Interestingly, the volume in SDS and SSO as a proportion of SPY volume rose from about 13% in early September to over 30% during the last two weeks. Moreover, if we look at yesterday's volume among all North American ETFs, Ultra funds occupied three of the top eight positions.

Because the Ultra funds are double-size relative to other index ETFs, they are excellent tools for assessing speculative activity in the stock market. What we've tended to see, when we correct for an ongoing rise in the popularity of the Ultra shares, is enhanced speculative activity when markets correct and a relative drying up of such activity as markets top out. From the perspective of sentiment, this may be a nice measure of market emotionality: fear/greed versus complacency.