February 01, 2022 – By Jerry Nix | Freewavemaker, LLC
What are the Qs that I am referring to?
Basically, they are Exchange Traded Funds that are built to mimic the action of the NASDAQ 100 Index. The Nasdaq 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.
There are three funds that I like to use when it comes to this index.
The first is QQQ – Invesco QQQ Trust:
The Nasdaq 100 is traded through the Invesco QQQ Trust. This product is designed to track the performance of the 100 largest companies on the Nasdaq exchange. Each company in the trust must be a member of the Nasdaq 100. Also, listed stocks need to have an average daily trading volume of 200,000 and publicly report earnings quarterly and annually.
Some exceptions are made for newly public companies that have extremely high market capitalizations. Companies with bankruptcy issues are omitted from the Invesco QQQ Trust. On occasion, the composition of the trust may not identically match the Index, but the main objective of the QQQ is still to track the price and performance of the underlying index. If we look at a performance chart of the QQQ fund as compared to the NASDAQ 100 Index ($NDX) we see the following:
In the chart, if you look closely, you will see green and red lines. The red is the QQQ performance line and the green is the NDX performance lines. You can see that these are pretty close to the same.
There are two other ETFs that track the NDX as well:
These ETFs use the TQQQ and the SQQQ symbols.
What is TQQQ?
This is the Pro Shares Ultra QQQ – Its objective is to seek daily investment results, before fees and expenses, that correspond to three times (3x) the daily performance of the Nasdaq-100 Index®.
The key here is DAILY INVESTMENT RESULTS and many day traders will use this as a day trading vehicle. You will see why later in this article. Here if the NDX goes up by 1% in a day you would expect this fund to return 3%. If the NDX goes down 1% then this fund would be expected to lose 3%.
What is SQQQ?
The ProShares UltraPro Short QQQ (SQQQ) is a 3x leveraged inverse ETF that tracks the Nasdaq 100, meaning it looks to return the exact results of the Nasdaq 100 index times three. This ETF follows the Nasdaq 100, which is heavily weighted toward technology and telecommunications stocks.
Again, this is fund that provides DAILY INVESTMENT RESULTS and many day traders will use this as a day trading vehicle. You will see why later in this article. Here if the NDX goes up by 1% in a day you would expect this fund to lose 3%. If the NDX goes down 1% then this fund would be expected to go up by 3%.
So, the QQQ is 1X the NDX; the TQQQ and SQQQ are 3X the NDX (Positive and Negative). Let’s take a look at a performance chart showing all three of these from VectorVest.
The above chart is a one-minute Intraday Chart for today 02/01/2022. We see that QQQ is up about 1% at the time this chart was created. TQQQ is up about 3% and SQQQ is down a little more than 3% for the day so far. I know it looks similar to an EKG you may see at the doctor’s office or a lie detector you may see in a police station … but it’s really a one-day performance chart of three different ETFs.
While the QQQ is invested primarily in the top 100 stocks of the NASDAQ Composite Index, the other two will also have derivatives (options and futures contracts) that allow the leverage to outperform the index up or down. These alone are very risky investments and the SEC warns investors to be aware of the risk before investing into them.
While I am not a big proponent of trying to time the market … I understand that others are, so these investments may help you along with that endeavor. My philosophy is that “Time in the market’s will generally yield more rewards than trying to time the market.” I believe this because I believe that no human or “artificial intelligence” at this time can get it right 100% of the time. In other words, one will never by at exactly the low of the market or sell at exactly the high of the market.
Two market timing techniques at VectorVest:
At VectorVest there are many market timing techniques that can be used. Rather than attempt to explain them all I will simply be using two in this article. The first is the Confirmed Market Up or Down Call.
The Confirmed Call:
This is their most conservative timing signal and it works off what they call “Their Color Guard.”
Here is a photo of that color guard today with some things that I have added to it:
In this color guard there are 6 columns. The Price, The RT (Relative Timing), the BSR (Buy to Sell Ratio), the MTI (Market Timing Indicator) the Trend and the Call.
The price – This is an arithmetic average of the price of all 9,110 stocks being tracked by VectorVest at this time. There is no weighting here like there is in many indices being used by investors today.
RT – This is the relative timing and is on a scale of 0 to 2. Anything above 1 is good and below 1 is not so good. Above 1 is strength and below 1 signifies weakness.
BSR – This is the Buy to Sell Ratio and they have recommendations on of all their 9,110 stocks being tracked at this time.
With 829 Buys and 2,970 Sells, that would be a Buy to Sell Ratio of about 0.27. Again, anything below 1.0 is signs of a weak market.
MTI – This is a timing indicator that takes into account the Price, RT and BSR. It is on a scale of 0 to 2 and anything below a 1 shows weakness and anything above a 1 shows strength in the markets.
Trend – This is currently Up/Dn meaning that the price is up (short-term trend) day over day and week over week but that the underlying trend (MTI) is below 1, so the longer-term trend is down.
The Call – Currently we are in a Confirmed Down Call and have been in one since 11/22/2021. According to their timing indicators we will not be in an up call until the Price is above the price of two weeks ago (10 trading days … and this moves daily) and the Buy Sell Ratio is above 1. It could take a while to get back to the Confirmed-Up Call.
The most aggressive market call they use is next …
The Green Light Buyer:
This is the timing signal the more aggressive investors who use VectorVest will use. If the Price line is in Green … they buy. When it goes to Red many will sell … or Sell Short (which is basically selling something you don’t own at a high price and hopefully buying it back later to “cover the short” at a lower price).
Based on the Color Guard shown in Figure 3 investors would have been selling short on January 25th, 26th and/or the 27th and covering those shorts and/or buying long on January 31st.
Using the Confirmed Call Signal with TQQQ and SQQQ:
One would think that if the SQQQ (even though it is bought long) since it is a fund that is actually short the market it would make sense to buy it when VectorVest goes to a Confirmed Down Market and sell it and buy the TQQQ when VectorVest goes to a Confirmed-Up Market.
Let’s take a look and see.
I have put together several portfolios that go back to January 2019. I will explain these as I go through them to keep the confusion to a minimum.
Portfolio #1: Buying TQQQ on a confirmed-up call and selling it and buying SQQQ on a confirmed down call.
First let’s take a look at the transaction log next …
You can see on January 18, 2019 we got our first confirmed up call of the year and we deposited $15,000 and purchased TQQQ. By May the 8th we got our first down call and sold TQQQ and used the proceeds remaining to purchase SQQQ. Since it seemed irrational to use opening or closing prices on these (as many could not purchase in the opening trade or sell at the closing trade) I used the average price for the day on all trades (in all portfolios) I will show.
Now let’s take a look at the portfolio:
As you can see, by June 2019 our portfolio would have been valued at above $25,000 but if we followed this scheme by today that value would have dropped to about $7,920 giving us an overall loss of about 47% or so. Not a good plan to say the least.
It should be noted that the last purchase of SQQQ (since 11/22/21) the day of the down call is actually up 25.24% – but overall, the investment portfolio is still down.
Portfolio #2: Buying SQQQ on a confirmed-up call and selling it and buying TQQQ on a confirmed down call.
Since that routine was so sour, I decided to reverse it an buy the short (inverse ETF) on the Up call and sell it and by the long (or same way ETF) on the down call. As you will see, that did not work out either. I will not repeat the transaction log here since it will be exactly reverse of the one seen in Figure 5:
As you can see here … the performance over all was so much worse here. An overall loss of about $10,243 or so or about 68%. So, that’s not the way to go either.
Also note that the last purchase of TQQQ on the confirmed down call of 11/22/2021 would be down a whopping 29.53% today vs. the last purchase of SQQQ in Figure 6 being up 25.24%.
It is important to note that these two funds, according to the Securities and Exchange Commission and the company that manages them are for day trading and not buy and hold vehicles.
But what if we ignore that advice? What would have happened had you bought them on 01/18/2019 and simply ignored and held them?
Let’s take a look:
Portfolio #3 – Buying and holding SQQQ (the inverse ETF):
Whoa … this technique would have lost you 97% of your investment and 95% of your portfolio since there was some remaining cash after investing $14,707 on 11 shares back on 01/18/2019). Not a good idea at all.
But, look what would have happened had you bought and held the TQQQ for the entire period.
Portfolio #4 – Buying and holding TQQQ (the triple leveraged ETF):
Hey now that’s not bad at all over a period of 3 years you would have grown your $15,000 investment portfolio to a total value of $82,629 for a gain of 450.16%. Sure, there would have been some drawdowns that may be hard to stomach, but over all that would be a pretty good equity line.
How would that compare to just buying the straight QQQ Investment Fund? Let’s take a look!
Portfolio #5 – Buying and holding QQQ:
That is not a bad return over three years, $15,000 to over $32,830 for a gain of 120%. Not as good as the 450% shown for the TQQQ … but not as much draw down during down markets either.
Now let’s take a look at the last investment scheme.
Portfolio #6: Buying the TQQQ on a green price light and selling it and buying the SQQQ on the following red price light of the color-guard.
Here’s the Transaction Log:
Remember, this is the more aggressive market call used at VectorVest.
Now let’s have a look at how this portfolio would have performed. We got our first green light on 01/18/2019 with the Confirmed-Up Call and did not get a red light in the price column until 05/08/2019. We got the last green light to buy TQQQ on 12/29/2021 so we sold the SQQQ and bought the TQQQ then and still hold it today.
Over all a return from $15,000 to a little more than $75,000 is not bad … that’s about a 400% return … but it was a lot of work considering one could have bought TQQQ on 01/18/2019 and held it for the full term and it would be worth $82,629 or a gain of 450% for doing nothing more than buying and holding and trusting that “TIME IN THE MARKET IS GENERALLY FAR MORE REWARDING THAT ATTEMPTING TO TIME THE MARKET,” – Even though since 12/29/2021 the investment would have lost about 27.85% in value from what it was worth on that date (see Figure 9 Portfolio 4)
Of course, both of these portfolios would have been much higher around the 20th of December 2021 than they are today (Portfolio 4 and 6).
If you choose to attempt to time the market, investments you may want to consider would be TQQQ and SQQQ.
If you choose to buy and hold then consider QQQ – or if your more aggressive, like me, consider TQQQ – especially if you believe like me that the market is going to go higher 67% to 72% of the time. If you are going to invest in the SQQQ … keep your timing extremely short and don’t be afraid to use stop loss orders or trailing stop loss orders.
Remember – after each down market the next high is generally higher than the previous high before the down-market turn.
Since first writing this article 2 days ago the market has gone up. However, this morning the market is down considerably. I have just purchased 100 shares of TQQQ (on a down market day). I expect the value to fall … and if it falls by another 10% (this investment) I will buy another 100 shares to hold. We will see after few months how it turns out.
Here’s my buy order in case you want to track it yourselves …
Good luck and Great Investing in the future!