Summary
- The highly leveraged SPXU short ETF has not been a good, long-term investment. Since its inception in June of 2009, SPXU has experienced an average annual loss of 44% a year.
- SPXU has short-term use only if one believes they can either correctly time a sudden market decline or want to hedge a portfolio against possible catastrophic events.
- Regarding this, I believe SPXU has immediate use in hedging against possible catastrophic events out of the Ukraine. The nuclear risk is not off the table as that war continues.
This article is part of a continuing series of articles (here)on how to use investor buying in exchange-traded funds ("ETFs") to help determine the direction of the stock market, and specific sectors of it. These articles areabout investor sentiment and the measurement of "investor expectations." Every article will have follow-up articles until the concept behind that original article is complete. T
SPXU
Named the UltraPro Short S&P500, SPXU is one of numerous ProShares ETF’s that go long or short the S&P 500. Some are leveraged 1x, some 2x, while others are leveraged 3x. SPXU is leveraged 3x. As of August 26th,it had 69 million shares outstanding with $1.61 billion in total assets.
History of SPXU Net Asset Value
This graph shows the price history of SPXU since inception. It started with an adjusted price of $32,000 in 2009, and it’s currently down to $14.75. That’s an annualized loss of 44% per year. Of course, we’ve essentially been in a long-term bull market since 2009, so this is not surprising for a highly leveraged, short ETF.
But other factors play into this and make it worse. To achieve a 3x short position, the fund’s money managers have to use S&P futures and sometimes S&P options. These come with carrying costs and varying price premiums over spot. In a nutshell, these additional factors accentuate the losses in SPXU.
The situation is made extra hard because of an additional fact. Stock prices advance 67% of the time and decline only 33% of the time. So, it’s twice as hard to find a market top than it is a market bottom. However, since the price gains can be very large if you succeed, the temptation to try is always there.
We highlighted on the chart four moments in the last 11 years - labelled A, B, C and D, where it would have been highly profitable to short the market using SPXU if your timing was perfect.
(A) was the two-week market decline in July and August of 2011 caused by the global financial crisis. In two weeks SPXU rose 60.5%
(B) was a four week decline in August of 2015 where SPXU went from $651.8 to $912.8 for a 40% increase.
(C) was the three-month market decline from early October 2018 to the end of December 2018 where SPXU rose 81%.
(D) was the five week, COVID-induced, bear market where SPXU rose 139%.
Timing these moments, however, is very difficult. You can lose half the expected gains if you’re right about the decline but are three to six months early.
SPXU Shares Outstanding
The chart below plots the number of shares outstanding in SPXU over the last two and a half years. Notice the huge increase in shares from July 1st until August 1st. The number of shares rose from 40,000 to 100,000, which is 150%, in just one month! Since then, the number has come back somewhat to around 70,000. We believe this is a very positive indicator for higher prices in the stock market. It represents simply too much bearish sentiment, which is both a necessary and sufficient condition for a market bottom.
Shares Outstanding In SPXU
This is also confirmed by average daily buying in SPXU, which is shown in the next graph. Notice the large increases in buying of SPXU that have historically occurred just prior to major advances in stock prices.
Contrary Opinion
Other, well tested indicators still show extreme levels of bearish sentiment. This is very important because, while the economic picture is always different, extremely negative sentiment is the one, common denominator at the start of every bull market. Many investors don’t know this and get lost in the arguments and alarming economic picture of the moment. Because of this, we are highlighting the data and theory that supports this at the end of every article.
Resource: Seeking Alpha
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