Shorting the US market with SQQQ – here’s what you need to know.

ProShares UltraPro Short QQQ ETF (NASDAQ:SQQQ) is a leveraged (3x) ETF that inversely tracks the Nasdaq 100 index. The ETF gained serious popularity amongst investors during the market crash in March earlier this year. It is important to understand the instrumental purpose of certain ETF’s before looking to invest. The SQQQ is a highly risky tool for day-traders and speculators, designed to short the US market over short periods of time, in this case the Nasdaq 100. The inverse 3x leverage on this ETF means it will reflect a skewed inverse relationship with the Nasdaq index, which is seen to have a negative relationship with time (on average). Lets breakdown understanding the ETF and why people are looking at SQQQ for a potential second market crash.

Understanding SQQQ’s main function for investors

At its most basic level, the SQQQ is designed to give speculators and day traders eye watering returns when they suspect the US market to correct or fall. The 3x leveraged inverse relationship simply means day by day, when the NASDAQ 100 index decreases by 10% – SQQQ will gain 30% and vice versa. Proshares discloses that the main function for SQQQ is to be traded over short periods of time (intraday). For example, if we look at the performance of SQQQ over the past 5 years, we can see it has lost 98% of its value. However, if we look at the 1 month performance between February and March this year, SQQQ almost doubled it’s value. Hence providing speculators and day traders with great returns whilst the market went into free fall.

Understanding what SQQQ is shorting?

Warren Buffet is known for his advocacy in thoroughly understanding the business you are buying shares in. In the same sense, understanding how an ETF moves is critical for an investor when forging an investment strategy. The NASDAQ 100 index is a basket of 100 large US listed companies (non-financial sectors) including the likes of Apple and Facebook. See the full list of 100 companies here.

In essence, the SQQQ is betting against some of the largest US corporations combined into one index, weighted by their market cap respectively. But instead of simply shorting, SQQQ is tripling down on the performance of these companies. If we can learn anything from history, long term bets against US corporations (as a collective) never pans out well. However, intra-day bets against US performance can prove a profitable strategy assuming the market sentiment is bearish.

The current position of SQQQ

With the current US market outlook highly up for debate, we can conclude that the NASDAQ index has outperformed the SP 500 index in recovery after the March crash. The tech rally is definitely an explanation for the fast recovery of the NASDAQ 100, with 6 big tech corporations making up half of the indexes weighting. The heavy weighting of tech in the index can be an argument for a volatile correction.

From a short term perspective, the SQQQ has performed well posting a 40% gain over the past 2 weeks, as the NASDAQ went into a technical correction. The current market sentiment is in tug of war between the bulls and the bears. Recent analysis from Michael Markowski predicts a 3 year bear market bottoming out in 2022 using Dot com and Great Depression data. Another interesting survey by CNBC found 51% of CFO’s believe the Dow Jones will fall below 19,000 again before recovering. Another market crash could provide SQQQ investors a golden opportunity to cash in on the decline (opinion not advice). However the associated risk should always be calculated and monitored as per Proshares recommendations (opinion not advice).

If you want to learn more about SQQQ, click here.

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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.

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