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Inverse Equity ETF Volume Plunges In A Possible Warning For Stocks

From Dana Lyons: Volume in stock ETFs designed to rise when the market falls has dried up significantly in recent days; is it a warning, or just noise?

We have been mentioning recently that one of our concerns regarding the stock market is the elevated, and nearly consensus, bullishness among market participants. Now, there are 2 categories of sentiment: what investors say they are doing and what investors are actually doing. The former includes surveys like the popular AAII and Investors Intelligence versions. We prefer the latter category, i.e., gauges of what investors are actually doing with their money. As they say, money speaks louder than words, and it is typically so in the financial market. If true, then sentiment may be looking a bit frothy right now, at least according to our Chart Of The Day.

The ChOTD shows the daily amount of volume traded in inverse ETF’s, expressed as a percentage of total exchange volume (notes: a) the series measures a group of popular inverse ETF’s that we’ve tracked for many years and is not inclusive of all such funds; b) we first saw this concept explored by Jason Goepfert of These inverse ETF’s, of course, are funds that are designed to move opposite a particular stock index. Traders use them as an equivalent to shorting the market, either as a hedge on their portfolio or as an outright downside bet on stocks. Like other inverse products, volume is generally elevated near market lows as traders get particularly fearful, or nervous. On the flip side, volume normally dries up substantially near market tops as traders become complacent, or less concerned about downside risk. The latter condition may be the case right now.

As the chart reveals, relative to overall market volume, the volume traded in inverse ETF’s on Friday, March 17 was the lowest that we’ve seen in nearly 10 years.


So is this indicator screaming “TOP!!”? Perhaps, but it is not so simple. First and foremost, Friday was expiration for a number of options and futures contracts. As such, volume in general was extremely elevated, especially compared to recent days and weeks. This is common for expiration days. It is also a factor in depressing the relative inverse ETF volume figure on Friday, as we have seen on expiration days the past.

But how much of a factor was it? And is this just a one-day wonder, or part of a larger trend? That is, have traders been overly aggressive in trimming their hedges at this point?

The ProShares Short S&P500 ETF (NYSE:SH) rose $0.05 (+0.14%) in premarket trading Wednesday. Year-to-date, SH has declined -4.84%, versus a 4.56% rise in the benchmark S&P 500 index during the same period.

SH currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #2 of 53 ETFs in the Inverse Equities ETFs category.

We’ll do a “deep dive” into the inverse ETF sentiment picture on our new “all-access” site, The Lyons Share, where members get our full research reports – as well as our complete macro market analysis EVERY DAY. If you find the original research we share here helpful and enjoyable, we think you’ll get a ton of value from The Lyons Share.

This article is brought to you courtesy of Dana Lyons, JLFMI and My401kPro.

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