The Neglected Power of Leveraged Share Volume
Chances are, if you are a trader, you know of and likely pay some attention to put to call ratios (PTCRs). Perhaps you even use this to help gauge overall market sentiment and/or whether there is extensive hedging going on. Historically, PTCR were the only way to foresee what markets were thinking in terms of positioning. As well, options were traditionally the only vehicle people could use to hedge positions or speculatively capitalize on smaller movements more dramatically.
However, since around 2010, there have been new ways for individuals to both hedge and speculatively position themselves for larger movements within greater funds. These are by means of leveraged shares and they operate under the same principle of options. Those who buy the inverse leveraged shares are either speculatively assuming a sell is going to happen or they are hedging their long positions with protection to the downside.
Yet despite these really powerful tools that have been made available, there has been a complete neglect of their predictive power on market activity. To demonstrate what I mean, let me show you what happens when we pool the volume of both bull and bear shares of some of the major indices (including UPRO, SPXS, SPXU, SPXL, SDOW, UDOW, TNA , TZA, TQQQ and SQQQ).
In the image above, you can see that, after a prolonged period of just clear bull market activity where bull share volume consistently surpassed bear share volume, we actually saw the first ever bearish cross in history on February 3rd, 2022 that subsequently lead to over a 12% decline in SPY. We then saw a bullish cross around May 23rd of 2022 and again on September 21st of 2022. Both of those led to an 8.86% and 11.05% increase in value on SPY respectively.
If we look at just the raw volume, we can see very clearly the market sentiment at key areas in history. We can also see that investors and/or institutions potentially foresaw a decline before it even happened. If we look at the above chart, we will see around November 24th of 2021 there was a complete engulfment of bullish volume on leveraged shares. This means that inverse bear shares were dominating the buying sphere in the market well before we even saw the start of our precipitous decline.
It actually would appear that leveraged share volume is more helpful and more powerful at predicting sentiment than PTCRs themselves. Let’s take a look at this image below:
This is pulling PTCRs from the ticker USI:PCC and shows that we really did not see any peak in PTCR activity at the market top. In fact, the PTCRs seems to be more reactive than predictive. Even if we take the cumulative Put Volume over Call Volume for SPX, using the ticker USI:PVSPX and USI:CVSPX, we do not see any significant indications in this activity to signal a potential top or bottom on the market. Again the data seems reactive:
But the question remains, are these results statistically significant? Do leveraged shares offer a statistically significant advantage to measuring stock sentiment and trajectory? The answer is actually yes. It is.
If we look at that image above, we can see the relationship between the PTCR (Ratio), Bull Volume (number of bull shares bought) and Bear Volume (number of bear shares bought) for SPY on SPY’s Open, High, Low and Close Price. The average R correlation coefficient for Bear shares is 0.672. This means, as bear Shares increase, so too does the Open, High, Low and Close Variable. Inverse for Bull volume. As bull volume increases, Open, High, Low and Close decrease. A little paradoxical yes, but the fact remains that the relationship is stronger for leveraged share volume than for PTCR volume.
So where does that leave us now?
Well, as of February 22nd, 2023 we have had a bearish cross in cumulative bear/bull volume. This continues to widen at this point indicating continual short positioning in the market. And unfortunately we do not know what a recovery looks like in terms of bear/bull shares. The best example of a recovery would be if data were available for 2008. As of right now, the only areas we can look at are the flash COVID crash and some various corrections that happened (i.e. 2018). However, despite all of those, bearish volume never really took off (see image below):
This is the first time in history we have seen this type of influx of bearish volume in the leveraged share sphere and so what the outcome will look like will be a unique and first time experience for us all. It will be exciting to witness first hand, but as of right now its difficult to make any type of affirmations. All we can say for sure is that the market continues to position itself extensively short and the short positioning does indeed surpass historical levels of leveraged share short positioning.
My thoughts, leave your questions and comments below and thanks for reading!
However, since around 2010, there have been new ways for individuals to both hedge and speculatively position themselves for larger movements within greater funds. These are by means of leveraged shares and they operate under the same principle of options. Those who buy the inverse leveraged shares are either speculatively assuming a sell is going to happen or they are hedging their long positions with protection to the downside.
Yet despite these really powerful tools that have been made available, there has been a complete neglect of their predictive power on market activity. To demonstrate what I mean, let me show you what happens when we pool the volume of both bull and bear shares of some of the major indices (including UPRO, SPXS, SPXU, SPXL, SDOW, UDOW, TNA , TZA, TQQQ and SQQQ).
In the image above, you can see that, after a prolonged period of just clear bull market activity where bull share volume consistently surpassed bear share volume, we actually saw the first ever bearish cross in history on February 3rd, 2022 that subsequently lead to over a 12% decline in SPY. We then saw a bullish cross around May 23rd of 2022 and again on September 21st of 2022. Both of those led to an 8.86% and 11.05% increase in value on SPY respectively.
If we look at just the raw volume, we can see very clearly the market sentiment at key areas in history. We can also see that investors and/or institutions potentially foresaw a decline before it even happened. If we look at the above chart, we will see around November 24th of 2021 there was a complete engulfment of bullish volume on leveraged shares. This means that inverse bear shares were dominating the buying sphere in the market well before we even saw the start of our precipitous decline.
It actually would appear that leveraged share volume is more helpful and more powerful at predicting sentiment than PTCRs themselves. Let’s take a look at this image below:
This is pulling PTCRs from the ticker USI:PCC and shows that we really did not see any peak in PTCR activity at the market top. In fact, the PTCRs seems to be more reactive than predictive. Even if we take the cumulative Put Volume over Call Volume for SPX, using the ticker USI:PVSPX and USI:CVSPX, we do not see any significant indications in this activity to signal a potential top or bottom on the market. Again the data seems reactive:
But the question remains, are these results statistically significant? Do leveraged shares offer a statistically significant advantage to measuring stock sentiment and trajectory? The answer is actually yes. It is.
If we look at that image above, we can see the relationship between the PTCR (Ratio), Bull Volume (number of bull shares bought) and Bear Volume (number of bear shares bought) for SPY on SPY’s Open, High, Low and Close Price. The average R correlation coefficient for Bear shares is 0.672. This means, as bear Shares increase, so too does the Open, High, Low and Close Variable. Inverse for Bull volume. As bull volume increases, Open, High, Low and Close decrease. A little paradoxical yes, but the fact remains that the relationship is stronger for leveraged share volume than for PTCR volume.
So where does that leave us now?
Well, as of February 22nd, 2023 we have had a bearish cross in cumulative bear/bull volume. This continues to widen at this point indicating continual short positioning in the market. And unfortunately we do not know what a recovery looks like in terms of bear/bull shares. The best example of a recovery would be if data were available for 2008. As of right now, the only areas we can look at are the flash COVID crash and some various corrections that happened (i.e. 2018). However, despite all of those, bearish volume never really took off (see image below):
This is the first time in history we have seen this type of influx of bearish volume in the leveraged share sphere and so what the outcome will look like will be a unique and first time experience for us all. It will be exciting to witness first hand, but as of right now its difficult to make any type of affirmations. All we can say for sure is that the market continues to position itself extensively short and the short positioning does indeed surpass historical levels of leveraged share short positioning.
My thoughts, leave your questions and comments below and thanks for reading!
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