Inverse ETF
This week’s edition of The Tobin Report will be a trade idea. The last few reports have been general, broad-based, and very “macro” related.
This week is action related.
Note: this is not investment advice. I’m not a financial advisor. I’m just a dude. A dude on the internet. A dude on the internet emailing you stuff. Okay that sounds kinda creepy. Moving along…
This week’s trade idea is an inverse ETF.
**This is a speculative play so if you execute this trade please understand what you are speculating on. For more information on inverse ETFs, you can visit the SEC website here for more info.
The Trade
I will be buying the inverse ETF, ProShares UltraShort QQQ.
The ticker symbol is: QID.
So what is an inverse ETF? Simply put, an inverse ETF designed to produce returns that are the opposite of the underlying benchmark index. In this example, QID goes up in value when the Nasdaq 100 pulls back. Conversely, if the Nasdaq goes up, QID goes down. Inverse. Just like the word implies. Boom.
So in this trade, I am expecting the Nasdaq to go lower…for several reasons.
My Expectations on Markets
While it is possible that this current market rally could continue for a few more days or weeks, the market could just as easily take another leg down. In fact, the leg down is my bet.
Fundamentally, here’s why:
We are currently in a bear market. Since June 16th, markets have rallied, but this is normal in bear markets. The current rally in the markets does NOT mean we are out of the woods. AKA Bear Market Rally.
Economic conditions continue to be weak. Why would I think the bottom is in without positive data indicating otherwise? Record debt. Record deficit spending. Global energy crisis. War in Ukraine. Imminent war in Taiwan. Weak jobs market. Record inflation. Recession. NONE of these appear to be improving. NONE. Re-read this bullet point and tell me which one is getting better.
We are in a rate hiking cycle. Higher rates = bad for stocks. Last I checked, Fed just raised ANOTHER .75 bps. Until this changes…the overall trend is down. We will bounce from time to time like we’ve seen…but the trend is down. Don’t fight the Fed on the way up. Don’t fight the Fed on the way down.
Technically, here’s why:
Technical analysis. This is my favorite. The CHART is telling me we correct further. Look at the daily chart below of the Nasdaq 100. The downtrend line shows us where markets hit an intermediate top before correcting further. We are currently pushing against that trend line now…potentially ready to move lower.
More technical analysis: aside from the downtrend line, we have also rallied higher since June 16th within the rising channel (dotted lines) over a short period of time. Even if you don’t agree that markets will go lower, it’s hard to deny the strong probability of a move lower in the short term.
Daily chart of QQQ
This is where the QID trade comes in.
Let’s look at the chart of QID. Remember, it should be the inverse of QQQ.
As you can see…QID looks ready to rocket higher. Man I love charts!! Look how clean it is. Price obeys the trend line and pivots precisely. (“PIVATTTT” - scene from the TV show ‘Friends’? Anyone?) (sorry, it’s hard to say ‘pivattt’ without thinking of that scene.) If you have no idea what I’m talking about, watch the :28 clip: here you go.
Okay, back on track…
I Could Be Wrong
Remember, I’m just a guy on the internet. I could be wrong, but I go with the probabilities.
How will I know if I’m wrong? If price breaks below the uptrend line of QID…or price breaks above the chart on QQQ…and CONFIRMS. Confirmation happens over the following trading day confirming it has broken the trend line. Until then…the trade is in play. The risk to reward ratio is skewed heavily to the upside. This is what is known as an “asymmetric trade”. Small risk to the downside for possible large gain on the upside.
ACTION: I will purchase shares of QID if it reaches $19.25 per share. It is currently trading at $19.36 as of 8/3. I will add to the position if price goes as low as $19.
Note: I never add my full position at one time. I like to leg into each position in 1/4 or 1/2 tranches. This allows me to buy lower until it hits my final target price. For example, if I plan on investing a total of $1,000 into a trade, I start with $250 or $500 then watch price.
If I miss it altogether because it never hits my initial price, I move on and wait for another trade. I never chase a trade.
Thanks for reading.
Eric
I hope this week’s edition of The Tobin Report has been helpful and educational. If you enjoyed reading this, I would appreciate you sharing this with a friend by clicking the “Share” button. It’s right underneath this sentence. In blue. 5 letters.