Mind Your Ts & Qs

Mind Your Ts & Qs

Authored by Peter Tchir via Academy Securities,

While it is clear that sentiment is turning more bearish, it is unclear, whether positioning fully reflects that or not.

CNN Fear and Greed IndexThis has dropped to 27 (fear, just above extreme fear), down from 54 (neutral) a month ago.

AAII Sentiment SurveyBearish responses, at 40.7%, are the highest in a year. That survey was as of last week and is likely to be even more skewed to bearishness this week.

Any contrarian has to look at those numbers and be a bit nervous that being bearish is crowded right now. Having said that, in this day of rampant day trading, a rabid “investor” base out there looking for home-runs on a daily basis, we need to look at other data points.

We are seeing large inflows into some speculative/volatile funds. ARKK, for example, had some relatively large outflows last week, but has followed that up in the past few days with sizeable inflows. KWEB had a steady pace of inflows during the portion of its decline that occurred since late June. But what really caught my attention is the flows into TQQQ.

Flows into TQQQ have surged in recent weeks. Shares outstanding have risen 28% in this $16 billion fund. While that is small relative to QQQ itself, which is $182 billion, and hasn’t exhibited quite the frenzy of inflows, the TQQQ flows are meaningful because it is three times leveraged.

In February, all the buying took time before the market finally bounced. In May the turnaround came more quickly. But, as we’ve been writing in recent T-Reports, this time is different. Selling “rips” has worked better than buying dips for a month or more now. The market seems tentative at best.

All the “butterflies” mentioned in this weekend’s T-Report seem to be flapping their wings more aggressively as the week goes on. That is without mentioning the ongoing supply chain issues or the increase of Chinese military flights in the vicinity of Taiwan.

Finally, as a contrarian, you risk being too early, because if sentiment is going to get worse, it is too early to bet the other way. That is particularly true, when there is evidence that alleged sentiment and positioning are not necessarily in line.

Maybe the TQQQ trade works again, but right now, I think we see more pain in leveraged, highly speculative bets, and would avoid those types of companies and sectors for the moment.

Tyler Durden
Wed, 10/06/2021 – 11:20

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